* Euro posts best weekly gain vs dollar since June
* Dollar falls for 3rd straight week vs yen
* Investors see more U.S. stimulus after U.S. jobs data
By Gertrude Chavez-Dreyfuss
NEW YORK, Sept 7 (Reuters) - The dollar dropped to a near
four-month low against the euro and a one-month trough versus
the yen on Friday after a smaller-than-expected rise in U.S.
jobs for August reinforced the view the Federal Reserve will
inject more stimulus into the sluggish economy.
Investors were focused on last month's non-farm payrolls
data to gauge whether the Fed will launch another round of
bond-buying after its policy meeting next week. The report
showed only 96,000 new jobs were added, while economists polled
by Reuters had expected 125,000..
"The disappointing U.S. jobs data increases the likelihood
of a balance sheet response by the Fed next week," said Marc
Chandler, global head of FX strategy at Brown Brothers Harriman
in New York.
The euro rose as high as $1.2806 against the dollar,
its strongest since late May, knocking out reported option
barriers at $1.2660 and $1.2700. It last traded at $1.2795, up
1.3 percent.
On the week, the euro rose 1.8 percent, its largest weekly
gain since June. Analysts said the euro's intraday bias remains
on the upside and the current rebound should now target the
$1.30 psychological level.
The lackluster employment report keeps the pressure on U.S.
President Barack Obama ahead of the November election in which
the health of the economy looms large. While dollar investors
may not have a favored candidate, the uncertainty of the
election is beginning to weigh on the currency.
Investors also raised the chances the Fed will keep rates on
hold for some time and engage in another round of quantitative
easing. Under the program, the Fed prints money to buy bonds,
which depresses Treasury yields and encourages investors to seek
higher returns elsewhere. An increase in the money supply erodes
the value of the dollar.
Following the U.S. jobs report, Nomura Securities said it
believes the Fed will announce a new round of quantitative
easing late this year and further extend its near-zero interest
rate policy to 2015.
U.S. short-term U.S. interest rates on Friday suggested that
the Fed will keep rates near zero until at least the second
quarter of 2015.
The euro was already higher before the U.S. jobs report as
investors cheered the European Central Bank's plan announced on
Thursday to lower borrowing costs for Spain and Italy.
ECB President Mario Draghi, backing up his promise to do
whatever it takes to preserve the euro, unveiled a new and
potentially unlimited bond-buying program aimed at lowering
painfully high borrowing costs for stressed member states.
Yields on Spanish 10-year government bonds fell below 6
percent for the first time since May, while Italian yields also
dropped, lifting the euro across the board.
The euro zone's common currency rose to its highest against
the Swiss franc in eight months and last changed hands at 1.2094
francs, up 0.4 percent on the day.
Market speculation that the Swiss National Bank could raise
its floor against the euro to 1.22 Swiss francs from
1.20 also prompted hedge funds to unwind bets the euro would
fall.
The euro climbed to a two-month high against the yen
. By early afternoon trading, the euro rose 0.5 percent
to 100.06 yen.
YEN BOOST
The jobs data also gave a huge boost to the yen. The dollar
fell 0.8 percent to 78.24 yen, with the low at 78 yen.
Leading up to the report, the yen had ceded ground against
the dollar this week after stronger-than-expected data on U.S.
private-sector employment triggered a rise in Treasury yields.
The dollar lost 0.2 percent against the yen, the third
straight week of declines.
The Australian dollar rose 1.1 percent to US$1.0396,
adding to Thursday's gains.
A flood of Chinese data on Sunday could provide a
challenging backdrop for the Australian dollar, which has
retreated over the past month on worries about a slowdown in
China, Australia's single biggest export market.
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