* Dollar rises vs euro on short covering
* Market awaiting U.S. jobs data due later in the day
* Traders watching rescue plan for U.S. automakers
By Kaori Kaneko
TOKYO, Dec 5 (Reuters) - The dollar rose against the euro on Friday as investors covered their short positions, but its gains were limited before a U.S. employment report that is expected to show the worst job losses in more than two decades.
The dollar had fallen on Thursday amid expectations that the European Central Bank's aggressive rate cut would help shore up the euro zone economy and stave off a deep recession.
Dismal U.S. jobs data is likely to encourage the Federal Reserve to cut rates to just 0.5 percent this month.
The U.S. economy is forecast to have lost 340,000 jobs in November, which would be the worst monthly job loss since 1982, according to economists polled by Reuters.
"A deterioration in the labour market will affect private consumption, which would dampen economic sentiment," said Satoru Ogasawara, macro strategist at Credit Suisse.
"The dollar is likely to appreciate against higher-yielding currencies on investors' increasing risk-aversion but is expected to be weighed down against the yen," he said.
The euro was nearly flat at $1.2780. It earlier fell as low as $1.2732 from late New York trade on Thursday, partly due to some investors liquidating investments to secure dollars before the year-end, traders said.
The European single currency was little changed at 117.95 yen, compared with a five-week low of 116.35 yen struck on trading platform EBS the previous day.
The dollar climbed 0.1 percent to 92.32 yen, after hitting its lowest point in five weeks at 92.05 yen on EBS in U.S. trading.
The market is also cautious due to uncertainty over the fate of troubled U.S. automakers and their attempts to secure government aid.
The chief executives of General Motors Corp and Chrysler LLC said they would consider restarting merger talks if needed to win their slice of up to $34 billion in emergency U.S. government aid.
The CEOs will appear again before the U.S. House Financial Services Committee on Friday.
"The dollar's gains will likely be limited before the U.S. jobs data and the U.S. automakers' testimony. But investors are likely to grow increasingly risk-averse and the dollar may move closer to 90 yen next week," said Kwang-ja Kim, deputy general manager at Shinsei Bank.
The ECB made its biggest-ever cut in interest rates on Thursday, lowering benchmark credit costs by 75 basis points to 2.50 percent as it forecast a grim year for the recession-bound euro zone economy.
The Bank of England also slashed rates to their lowest level since 1951 and indicated more needed to be done to prevent a credit squeeze tipping Britain's economy into a prolonged recession.
The yen and dollar were likely to hold their strength against European currencies as rate cuts erode the advantage of higher-yielding currencies, said Yousuke Hosokawa, treasury department senior manager at Chuo Mitsui Trust and Banking. (Additional reporting by Satomi Noguchi; Editing by Chris Gallagher)