* Risk appetite increases after U.S. data
* Strong U.S. jobs reading offsets weaker ISM data
* Safe-haven dollar, yen, Swiss franc under pressure (Updates prices, adds quote, details)
By Wanfeng Zhou
NEW YORK, Sept 3 (Reuters) - The U.S. dollar fell against the euro and commodity currencies on Friday after surprisingly strong U.S. jobs data eased worries about the outlook for the economy and boosted appetite for riskier assets.
The safe-haven yen and Swiss franc weakened broadly, while higher-yielding currencies such as the Australian and Canadian dollars gained as expectations grew the U.S. labor market may not be as weak as many had feared.
However, optimism about the U.S. economy faded somewhat after separate data showed the non-manufacturing sector grew at a slower-than-expected pace in August. That prompted major currencies to consolidate in ranges as liquidity thinned ahead of the Labor Day holiday weekend.
"Risk-on is definitely the trade today," said John Doyle, senior currency strategist at Tempus Consulting in Washington. "And we've seen the dollar fall accordingly against the higher-yielding currencies."
In midday trading, the ICE Futures U.S. dollar index <.DXY>, which tracks the greenback versus a basket of six currencies, fell 0.4 percent to 82.122.
U.S. nonfarm payrolls fell 54,000, the Labor Department said, a much smaller drop than an expected decline of 100,000. In addition, private employment, considered a better gauge of labor market health, increased by 67,000.[ID:nN02227856]
The euro traded at $1.2878
The dollar earlier rallied more than 1 percent to a session
high of 85.22 yen
The dollar hit a 15-year low of 83.58 yen on electronic trading platform EBS late last month as fears the U.S. economic recovery was stalling pushed U.S. Treasury yields lower.
Investors have been reluctant to push the yen much higher after Japanese authorities said they could take action -- normally a code word for intervention -- to stem yen strength.
The euro jumped 0.9 percent to 1.3108 Swiss francs
"The yen and Swiss franc are both down against the greenback, a 'text-book' example of a slip in safe-haven support," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.
CAUTION REMAINS
Expectations of a Federal Reserve rate hike next year grew after the jobs data. Traders now see about a 68 percent chance the Fed will increase its target interest rate at its Sept 2011 meeting, fed funds futures showed. [ID:nN03275974]
The dollar had come under pressure in recent sessions as speculation of more quantitative U.S. easing gained ground following a raft of weak numbers. Fed Chairman Ben Bernanke has said he is prepared to ease monetary policy further if the U.S. economic slowdown worsens.
While the jobs report might mitigate fears of a double-dip recession, some analysts cautioned that the U.S. economy is still in for a slow recovery.
"Just as trading on the bad U.S. data recently was overdone, I think sentiment on this week's positive reports is also going to be overdone," said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank in New York. "You have a lot of people unemployed, so it's a long way back to normal."
An increase in risk appetite lifted commodity currencies.
The Australian dollar rose 0.6 percent to US$0.9158
The Canadian dollar hit a two-week high, with the greenback
falling 1.1 percent to C$1.0412