* Dollar index slips before U.S. payroll data
* Speculation of smaller jobs slide boosts risk demand
* Euro supported after ECB cuts rates, plans asset buys
(Updates prices)
By Naomi Tajitsu
LONDON, May 8 (Reuters) - The dollar slipped, while the euro rose on Friday ahead of a key U.S. employment report, as expectations that the pace of job losses may be slowing prompted some traders to take on more risky positions.
Trade was quiet following a muted reaction to results of a U.S. bank stress test, which did not yield any negative surprises. Choppy moves calmed from Thursday, when the central banks of the UK and the euro zone took more policy action to help their ailing economies.
Markets offered little reaction to figures showing that German industrial output was unchanged in March from February, when it fell a revised 3.4 percent
Many traders opted to stick to the sidelines ahead of U.S. non-farm payrolls for April, which are due at 1230 GMT. Expectations are for the economy to have shed 590,000 jobs, a staggering number, but less than 663,000 in March.
The dollar slipped against a currency basket, sticking near a 1-1/2-month low hit on Thursday, as speculation of a fairly optimistic jobs reading prompted some traders to pick up the euro and sterling -- currencies perceived to hold higher risk.
"In previous months, it's always been how much worse the payrolls will be but this month the shoe is on the other foot and people are hoping for a positive surprise," said Johan Javeus, chief currency strategist at SEB Merchant Bank in Frankfurt.
"Normally, people reduce risk ahead of key data, but today people might bet that the payrolls number will actually turn out better than expected."
Analysts said that a positive reading would normally boost the dollar on the view that the economy may finally be recovering. Yet given the focus on risk demand, solid data may boost the market's appetite for risk, which could put the dollar under selling pressure.
EURO BOOSTED ON ECB
The dollar index, which tracks its movement against a basket of currencies, slipped around 0.3 percent to 83.635. On Thursday, it fell to 83.424, its lowest since late March.
Currency strategists pointed out that a steepening in the U.S. Treasury yield curve -- which put the two-year/10-year spread at around 200 basis points, its widest since November -- was weighing on the dollar as it was a sign of ebbing risk aversion.
A 2 percent rise in European shares also added to the view that markets were gaining confidence that the global economy is recovering.
By 1122 GMT, the euro traded at $1.3420, near a session high of around $1.3432 hit in early European trade. It rose roughly 0.2 percent on the day, recovering from a session low of $1.3343.
The common European currency was supported near a one-month high of $1.3471 hit on electronic trading platform EBS on Thursday, when the European Central Bank cut interest rates to a record low 1.0 percent and said it would start buying 60 billion euros' worth of covered bonds to boost credit liquidity.
While such unconventional policy measures and forays into quantitative easing often results in a weaker currency, the euro rose after the announcement on the view that the ECB was taking action -- however limited -- to to help its ailing economy.
At the same time, some analysts said that the limited nature of the ECB's initiative was also boosting the euro on the view that the increase in euro liquidity would be much less that the efforts by the Federal Reserve and the Bank of England to essentially create money to purchase their country's assets.
"The market is right in pushing up the euro on the ECB," said Robert Minikin, senior currency strategist at Standard Chartered in London.
"The ECB is taking a more measured approach (than the Fed and the BoE), one that will be more easier to unwind."
ECB Governing Council member Erkki Liikanen on Friday said euro zone rates at 1 percent were appropriate for now but are not necessarily as low as they can go, echoing similar comments from ECB President Jean-Claude Trichet the previous day.
Sterling was up slightly at $1.5060, after falling from a four-month high around $1.52 on Thursday after the Bank of England said it would follow up its 75 billion pound asset-buying plan with an additional 50 billion pounds to help boost the economy.
The dollar inched up 0.1 percent to 99.35 yen.
Speculation that Friday's jobs data may be stronger have risen due to a slide in unemployment claims in past weeks, while data earlier this week showed the U.S. private sector in April eliminated the fewest jobs since last November and far fewer than in March.
"The downward move over the past four weeks in claims, along with improvement in the employment indexes in the ISM surveys, is signalling some fading in the rate of contraction in payrolls," analysts at UBS wrote in a research note.
(Reporting by Naomi Tajitsu; Editing by Victoria Main)