Dollar, global shares shaky ahead of U.S. jobs data

By Richard Hubbard

LONDON (Reuters) - The dollar sank to a two-month low against a resurgent yen on Friday and world shares headed for a third week of losses as markets experienced an uneasy run-up to U.S. jobs data later in the session.

The non-farm payrolls report due at 1230 GMT is expected to show a 170,000 rise in jobs for May, suggesting the economy is still in a rut and not ready for the Federal Reserve to cut back monetary support.

A strong number would fuel fears of an early tapering of the Fed's extensive quantitative easing (QE) programme bond, with implications for all riskier assets.

"The markets are quite nervous about it ... They need reassurance about QE to be stable, so a strong number would cause a disruption," said Hans Peterson, global head of investment strategy at SEB Private Banking.

World share markets have begun to price in expectations of a tapering in Fed spending, hovering near six-week lows on Friday with U.S. stock futures pointing to further weakness on Wall Street ahead.

Also reflecting declining hopes for rate cuts from the European Central Bank, European shares lost 0.2 percent to 1,176.16 points at 1200 GMT, staying near the six-week lows they touched in a selloff on Thursday.

JAPAN FEARS

The dollar dropped 1.5 percent against the stronger yen to hit a low of 95.28 yen, a day after posting its biggest fall against the Japanese currency in three years.

As well as uncertainty over the Fed's next moves, the dollar's fall has been linked to worries over Japan's commitment to boosting its economy and signs of slower growth in China, which have encouraged demand for the yen.

That in turn sparked another selloff on Friday in Japanese stocks, which plunged to a two-month lows and recorded their worst week in two years.

In the debt market, safe-haven German debt edged higher but trade was expected to be choppy leading into the U.S. data.

European Central Bank President Mario Draghi tempered expectations for imminent euro zone rate cuts on Thursday, which boosted demand for Bunds as they headed for their first weekly rise in three weeks.

His message on Thursday triggered the biggest daily drops in Italian and Spanish bonds and pushed the euro to its highest level against the dollar since February. All hovered near those levels in mid-morning.

Austria's ECB policymaker Ewald Nowotny told reporters it was possible there would be no additional ECB measures if the euro zone's economy picked up as expected.

The euro was last at $1.3242 as it edged back from the previous session's high of $1.3306, while against the stronger yen it was down at $1.3242, having hit its lowest level since mid-April.

The Bundesbank trimmed its German growth forecasts on Friday but there were signs that Europe's largest economy is regaining some momentum after its exports rose in April and imports surged even more.

COMMODITIES STEADY

The sharp fall in the dollar lent support to the prices of a wide range of commodities as it makes them cheaper for holders of other currencies.

"If the jobs data comes in weaker than expected, it may mean the Fed postpones tapering of its quantitative easing which should weigh on the dollar and support metals," said economist Alexandra Knight of National Australia Bank in Melbourne.

Copper traded on the London Metal Exchange steadied at $7,331.50 a tonne, while gold slipped 0.2 percent to $1,409 an ounce, with both metals on course for weekly gains.

Brent crude edged above $104 a barrel due to the weaker dollar, putting it on track for a weekly gain of 3.4 percent, its best since late April.

(Additional reporting by Marc Jones and Toni Vorobyova; Editing by John Stonestreet and Susan Fenton)