* U.S. economy creates 138,000 jobs in May, jobless rate dips
* Dollar sells off across the board
* Rate futures show 87 pct chance of June hike after jobs data (Recasts throughout, changes byline, dateline; previous LONDON)
By Gertrude Chavez-Dreyfuss
NEW YORK, June 2 (Reuters) - The dollar fell 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 euro and Swiss franc, while sliding from a one-week high 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, while the consensus forecast was for 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 derail the Federal Reserve from raising interest rates this month.
“A hike in June is still on the table but the news flow will have to improve for the Fed to keep tightening in the second part of the year,” said Thomas Julien, U.S. economist, at Natixis North America in New York.
Traders now see a roughly 87 percent chance of a Fed rate increase on June 14, down slightly from 89 percent before the jobs report.
They continue to see 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 early New York trading, the dollar index fell to a seven-month low and was last down 0.3 percent at 96.873
The euro was 0.5 percent higher against the dollar to $1.1265, after earlier rising to a seven-month peak of $1.1282.
Against the yen, the dollar fell from one-week highs and last changed hands at 110.74 yen, down 0.5 percent.
The dollar also slid to seven-month troughs versus the Swiss franc, trading last at 0.9664 franc, down 0.5 percent.
Reporting by Gertrude Chavez-Dreyfuss; Editing by W Simon