By Naomi Tajitsu

LONDON, Aug 6 (Reuters) - The dollar struggled near a 3
1/2-month low versus a currency basket on Friday as investors
braced for U.S. payrolls data expected to show a fall in jobs
for a second month, underlining the fragility of the labour
market.

Currencies were generally little changed as traders steered
clear of big positions before the much-anticipated data,
leaving the dollar stranded close to a three-month low against
the euro and an eight-month trough versus the yen hit earlier in
the week.

An unexpected rise in weekly U.S. jobless claims on Thursday
fuelled speculation that the payrolls reading would be weak, and
analysts said dollar risks were skewed to the downside as
Friday's data was expected to show the U.S. economic recovery
was losing steam.
"We expect a number slightly better than consensus, but it's
questionable whether this will help the dollar as interest rates
are so low and we have a divergence of softer U.S. economic data
and stronger European data," said Marcus Hettinger, global
currency strategist at Credit Suisse in Zurich.

Forecasts are for the U.S. economy to have shed 65,000 jobs
in July. Data on Thursday showed new claims for jobless benefits
rose by 19,000 last week, although these figures will have no
bearing on Friday's data.
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Hettinger said dollar weakness would continue in the run-up
to a monetary policy meeting of the Federal Reserve next week,
as a spate of weak economic data has strengthened the argument
the central bank may have to offer further stimulus to boost the
economy.

Speculation of looser U.S. monetary policy drove the
two-year U.S. Treasury yield to a record low this week. Analysts
say this has tarnished the appeal of short-term U.S. debt among
overseas investors, pummelling the dollar.

By 0736 GMT, the euro was flat on the day at $1.3190, but
hovered in range of $1.3262 hit earlier this week, its strongest
since early May.

Some analysts said the euro had room to gain if German
industrial output data due this morning come in strong. A string
of solid German numbers has supported the view that the euro
zone economy is improving faster than the U.S.

DOLLAR/YEN PRESSURE

Support for the euro helped to keep the dollar index
slightly lower on the day at 80.711, after it fell as low as
80.469 on Monday, its lowest since mid-April.

The index, however, appears to have some support around
80.50, having managed to hold near its 200-day moving average,
which stood at 80.792 on Friday.

Against the yen, the dollar rose 0.4 percent to 86.13 yen,
treading above 85.32 yen hit on Wednesday where technical
analysts saw some support for the U.S. currency.

A fall under that level would mark the dollar's weakest
since November 2009, and a breach of 85.00 yen is seen cranking
up rhetoric by Japanese officials that the yen is too strong.

"If the dollar breaks below the November low, it could enter
a whole new world," said Minoru Shioiri, chief manager of forex
trading at Mitsubishi UFJ Morgan Stanley Securities.

Traders said a sizable volume of knockout option positions
below 85 yen suggested that the dollar's fall could become more
volatile if it does step into those price levels.

While further yen gains could stir talk of yen-selling
intervention by Japanese authorities, many market players think
Tokyo is unlikely to pull the trigger at this time.

(Additional reporting by Tokyo Forex Team, editing by John
Stonestreet)