The dollar steadied on Friday after steep losses the previous day on growing concerns about the U.S. economy, with key monthly non-farm payrolls data looming.

The greenback hit its lowest this year against the yen below 87 yen on Thursday as market players covered short cross yen positions.

The dollar index .DXY, a gauge of its performance against six other major currencies, hovered above a two-month low after it shed 1.6 percent on Thursday.

The index was little changed at 84.64, having broken through its 55-day moving average at around 85.

Economists forecast a loss of 110,000 U.S. jobs in June compared with an increase of 431,000 jobs in May, partly skewed by a drop off in temporary workers hired in May to complete the census.

Private payrolls are seen rising 112,000 from +41,000 in May with the unemployment rate inching up to 9.8 percent from 9.7 the previous month.

Opinion was divided as to how the market would react to a weaker than expected reading.

The prospective reaction is not clear-cut. Yesterday's sharp sell-off in the dollar may provide the most up-to-date clue, but there are less fraught channels to play the pessimism, said Daragh Maher, deputy head of FX strategy at Credit Agricole CIB.

AUD/JPY and NZD/JPY are obvious choices as shorts, while the Swiss franc will also likely reap the benefits.

Others say if the data at 1230 GMT show even more U.S. jobs are lost than forecast, the dollar could re-test 86 yen to the dollar.

A decline in U.S. Treasury yields may also keep pressure on the dollar. But others said some of the dollar pessimism may have been played out, so any fall would be limited.

EURO PESSIMISM EASES

The greenback was up 0.3 percent at 87.92 yen after hitting a seven-month low of 86.96 yen JPY=. Japanese exporter offers were likely to emerge in the low 88 yen range, a dealer at a Japanese bank said.

One-month implied volatility for dollar/yen pulled back to around 12.75/13.25 JPYVOL from around 14 percent on Thursday as the dollar fell to 7 month lows against the yen. Option triggers were seen below 85 yen, traders said. The dollar hit a 14-year low of 84.82 yen last November.

The euro surged more than 2 percent on Thursday to $1.2541 in its biggest one-day advance since mid-March last year, and on Friday it was holding around $1.2501 EUR=.

Easing concerns about euro zone liquidity problems after a lower take-up of European Central Bank funding and successful bond auctions prompted players to cover short euro positions.

It seems as if investors braced for the worst from the euro zone risk events are now relieved that the worst didn't come to pass, analysts at UBS said in a note.

But analysts expect banking sector problems will continue to plague European assets.

The euro faced resistance at $1.2570, a 38.2 percent retracement of its decline from $1.3692 in April to $1.1876 in early June. Another key level was its 55-day moving average around $1.2550.

The euro rose 0.7 percent to 1.3356 Swiss francs EURCHF=R after hitting a record low 1.3073 on Thursday.

The Australian dollar AUD=D4 rose versus the greenback and yen after Australia's government announced a watered-down version of a proposed mining tax, easing concerns it could hurt business investment and share prices. (Additional reporting by Charlotte Cooper, editing by Patrick Graham)

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