NEW YORK (Reuters) - The dollar dropped to seven-month lows on Friday after data showed the U.S. economy created fewer jobs than expected last month, which could derail a possible interest rate hike by the Federal Reserve in the second half of this year.
The greenback fell to seven-month troughs against the euro and Swiss franc, while sliding to a two-week bottom versus the yen.
Data showed that U.S. nonfarm payrolls increased just 138,000 last month as the manufacturing, government and retail sectors lost jobs. The consensus forecast had been 185,000 new jobs.
March and April data was revised to show 66,000 fewer jobs created than previously reported. May's job gains marked a sharp deceleration from the 181,000 monthly average over the past 12 months.
The unemployment rate, however, fell to a 16-year low of 4.3 percent.
Despite the big miss in payrolls, analysts said this would not necessarily prevent the Fed from raising interest rates this month.
"This is a broadly grim jobs report, but not quite grim enough to blow the Fed off course," said David Lamb, head of dealing at FEXCO Corporate Payments in Edinburgh.
"The momentum - and expectation - for a June interest rate hike is sufficiently strong to ensure that (Fed Chair) Janet Yellen will still pull the trigger as expected on June 14th."
He noted, however, that the Fed's plan to push rates higher repeatedly later this year now looks far from certain.
In late trading, interest rate futures have priced in a 96 percent chance of a Fed rate increase on June 14, according to the CME's FedWatch.
Traders continue to see a slightly less than an even chance for one more rate hike before the end of the year, based on the price of fed funds futures contracts traded at CME Group Inc's Chicago Board of Trade.
In late trading, the dollar index fell to a seven-month low and was last down 0.5 percent at 96.725
The euro was 0.6 percent higher against the dollar at $1.1276, after earlier rising to a seven-month peak of $1.1282.
Against the yen, the dollar fell to two week lows and last changed hands at 110.44 yen, down 0.8 percent.
The dollar also slid to seven-month troughs versus the Swiss franc, trading last at 0.9633 franc, down 0.9 percent.
Reporting by Gertrude Chavez-Dreyfuss; Editing by David Gregorio