* Dollar gives up gains vs euro as yen rallies 1 pct
* Fed rate-hike outlook remains clouded
* U.S. unemployment rate lowest since 2008 (Adds dollar downturn, late prices)
By Michael Connor
NEW YORK, Sept 4 (Reuters) - The dollar eased on Friday as data showing U.S. unemployment in August at its lowest since 2008 did little to clear away currency markets’ uncertainty over whether the Federal Reserve will raise interest rates later this month.
In a report many analysts had seen as key for Fed policymakers, the government said nonfarm payrolls increased 173,000 last month as the manufacturing sector lost the most jobs since July 2013.
That marked a slowdown from July’s upwardly revised gain of 245,000 and was the smallest rise in employment in five months. However, it might have been weighed down by a statistical fluke that has led to sharp upward revisions to August payroll figures.
Average hourly earnings increased 8 cents, the biggest rise since January, and the workweek rose to 34.6 hours.
The jobless rate declined 0.2 percentage point to 5.1 percent, its lowest level since April 2008 and in the range that most Fed officials think is consistent with a low but steady rate of inflation.
“The headline was a little weak, but every other metric was strong,” said Win Thin, global head of emerging markets at Brown Brothers Harriman & Co in New York. “No one thinks the September (rate hike) is a done deal, but this certainly supports that.”
Expectations of a September rate hike by the Fed have waned as a slowdown in China has brought increased market volatility across asset classes. That has caused the dollar to struggle in recent weeks, especially against the yen.
The dollar index of major currencies traded against the greenback repeatedly fluctuated between gains and losses and last was off 0.13 percent.
The dollar was down 1 percent against the yen, which was last at 118.90 yen.
The dollar was down about 0.25 percent to $1.1150 against the euro, which benefited from unwinding of euro-funded carry trades. Both the yen and euro have risen during the recent global equities sell-off and were gaining late on Friday as Wall Street dropped sharply.
The euro hit a two-week low against the dollar on Thursday after European Central Bank President Mario Draghi said the bank’s bond-buying program may run beyond September 2016 and that its size and composition may be adjusted. (Reporting by Michael Connor in New York; Editing by Lisa Von Ahn and Jonathan Oatis)