* U.S. July payrolls fall less than forecast
* Dollar hits highest level versus yen since mid June
* Interest rate futures fall after data (Adds comments, details)
By Vivianne Rodrigues
NEW YORK, Aug 7 (Reuters) - The dollar rose broadly on Friday as better-than-expected data on U.S. employment added to evidence the world's largest economy is turning around.
Traders said the dollar's reaction to U.S. economic news is starting to change, with the currency now gaining on signs of an economic recovery. For months, the greenback had risen in the wake of unfavorable reports as investors sold riskier assets overseas and bought the dollar as a safe haven.
The dollar on Friday hit its highest level against the Japanese yen since mid-June after Labor Department figures showed U.S. employers cut 247,000 jobs in July, far less than expected and the smallest monthly decline since last August. Stock prices rose and interest rate futures fell.
The jobs data on Friday follows other upbeat reports on the U.S. manufacturing and housing sectors released earlier this week, which raised expectations that the U.S. economy will outperform other developed regions, boosting the value of dollar-denominated assets.
"This a sign that the currency markets are weaning themselves from 'the good news is bad news' for the dollar syndrome and returning to fundamental measures of economic growth and interest rate cycles," said Joseph Trevisani, chief market analyst at FX Solutions, in Saddle River, New Jersey.
In late morning trading in New York, the euro was down 1 percent at $1.4207 after briefly trading at a session low of $1.4197, according to Reuters data. The dollar jumped more than 2 percent to 97.43 yen, its highest since mid-June. The U.S. currency was on track for its biggest daily gain versus the yen in about two months.
With fewer workers being laid off, the unemployment rate eased to 9.4 percent in July from 9.5 percent the prior month, the Labor Department said, the first decrease in the jobless rate since April 2008.
"We've seen improvement in housing, in manufacturing output and now clearly in the job environment," said Greg Salvaggio, a vice president for trading, at Tempus Consulting, in Washington, D.C.
"Add this up and it will eventually lead to dollar gains as we think the U.S. economy will emerge more quickly from recession," he added. "This could be the start of the unwinding of the inverse stocks-dollar correlation."
HIGHER RATES
U.S. short-term interest rate futures fell on Friday after the payrolls report, pushing up the implied chances for Federal Reserve rate increases. Bets on a Fed rate hike by year end, jumped as high as 46 percent, from 34 percent shortly before the data. The Fed's benchmark interest rates are currently in a range of zero to 0.25 percent.
Still, some analysts warned that aggressive bets on a rate hike this year may be premature.
"This all looks very aggressive in the context of data that may be better than expected, but is far from strong," Alan Ruskin, chief international strategist at RBS Securities, said in a note. "But for now this is all U.S. dollar supportive."
Earlier this week the dollar plunged while the euro rose to a 2009 high of $1.4446, according to Reuters data. A gauge of the dollar's performance against six major currencies was up 0.9 percent at 78.844 after touching its lowest point in more than 10 months on Wednesday.
Currency analysts at Wells Fargo Bank in New York said that economic performance may become increasingly important, and on that basis, they expect the dollar to outperform the euro and the yen in the months ahead.
"This report supports the picture that the worst has past," said Brian Dolan, a chief currency strategist, at Forex.com, in Bedminster, New Jersey. (Additional reporting by Steven C. Johnson and Wanfeng Zhou in New York; Editing by Leslie Adler)