* Strong jobs data boost dollar, stave off selling
* Pimco FX manager says euro may struggle
* Euro/dollar sentiment in options market darkens (Adds fresh quotes, risk reversal signals, updates prices)
By Gertrude Chavez-Dreyfuss
NEW YORK, Nov 5 (Reuters) - The dollar rallied on Friday as unexpectedly strong U.S. job gains in October suggested the economy may well be on a stable road to recovery.
The nonfarm payrolls data came two days after the Federal Reserve committed to inject $600 billion to boost the flagging economy and gave the greenback temporary relief from a broad sell-off.
The strong jobs data left some investors open to the possibility that the dollar may have carved a bottom against the euro, despite the prospect of more quantitative easing.
The Labor Department reported the U.S. economy added 151,000 jobs in October, blowing past expectations for a 60,000 rise and marking the fastest pace of hiring since April.
"Given that we have seen improving numbers since June and combine that with better business sentiment numbers, we're having indications that the economy is turning in the right direction. The U.S. is regaining some traction," said Thomas Kressin, senior vice president and lead portfolio manager of Pimco's Global Investor Series FX Strategy Fund in Munich, Germany.
The currency fund has assets under management of about 100 million euros (roughly $140 million).
In midday trading, the euro was down 1.1 percent at $1.4035, a day after hitting a 9-1/2-month high of $1.4283. It earlier fell to a session low at $1.4027, according to EBS data, in the wake of the jobs data..
Market participants had been selling the euro anyway as concerns over Ireland's austerity budget prompted a widening in peripheral euro zone bond spreads. The premium investors demand to hold 10-year Irish government bonds rather than the perceived safety of German benchmarks rose to a euro lifetime high after Dublin proposed a budget that some traders said was "unrealistic."
DOLLAR MAY END STRUGGLE WITH EURO
"I have a difficult time believing that the dollar will continue to underperform vis-a-vis the developed world, especially the euro, given the problems we have in the euro zone," said Pimco's Kressin. "It's just a matter of time before the market refocuses on the domestic issues in the region."
Kressin added that the quantitative-easing theme has been played out in the market the last several months, and the dollar would need a new driver for it to weaken further. "It's tough to see that right now," he said.
Traders said stop-losses in the euro were hit all the way down while a surprise drop in German manufacturing orders also dented euro sentiment.
Investors in the options markets have also turned increasingly bearish on the euro following the jobs report.
The euro/dollar risk reversal, a barometer of currency sentiment, has been indicating a decline in the curve or a growing negative view on the pair the last few weeks. But the euro's "put" bias deepened on Friday.
Euro puts are being traded at a mid-market of -1.125 vols, according to GFI data, with bids at -1.50. A week ago, the mid-market level was at -0.925.
Some strategists, however, do not expect the euro to fall significantly versus the dollar even with sovereign debt concerns in the euro zone and the robust U.S. payrolls report.
"The FX reaction is remarkable for the initial negative euro/dollar response, but this is not seen leading to a serious challenge of key downside levels," said Alan Ruskin, global head of currency strategy at Deutsche Bank.
"We need a string of these kinds of numbers before it is realistic to flirt with the Fed terminating the QE2 exercise before the Q2 2011 'due date.'"
The dollar rose 0.7 percent against the yen to 81.29, not far from session highs at 81.48. Traders cited talk of huge stop-loss buy orders above 82.00. On previous runs to that level, the currency pair had faced heavy selling from Japanese corporates and U.S. institutional funds.
The Bank of Japan earlier concluded a policy review without easing further. The yen firmed slightly after the announcement on disappointment that the central bank had not unveiled any expansion of its asset buying plan in response to that of the Fed.
The dollar was up around 0.9 percent versus a currency basket at 76.527, bouncing from an 11-month low touched on Thursday of 75.631. (Editing by Leslie Adler)