* Dollar takes a breather; Chinese money market rates weigh * Soft U.S. jobs data cements view Fed stimulus to stay By Gertrude Chavez-Dreyfuss NEW YORK, Oct 23 (Reuters) - The dollar edged up from near two-year lows against the euro and an 8-1/2-month trough versus a major currency basket on Wednesday, as investors sought the greenback's safety following a spike in China's short-term money market interest rates. Concerns about soft U.S. jobs data for September, which appeared to rule out a cut in U.S monetary stimulus before next year and caused a plunge in the dollar, took a back seat for now, as Chinese money market rates climbed to levels not seen since July. The People's Bank of China failed for a second day to inject cash. Rising liquidity needs for Chinese corporate tax payment deadlines and worries about bad banking debt seemed to partly responsible for the the jump in short-term rates, analysts said. The rate spike was short-lived but caused a market panic nevertheless, causing a scramble for safe-haven dollars and yen. "The weight of a weak U.S. non-farm (payroll data released on Tuesday) is surpassed by rising risk aversion on concerns over China's money market. Profit-taking takes hold," said Camilla Sutton, chief currency strategist, at Scotiabank in Toronto. In early New York trading, the euro was down 0.1 percent at $1.3768. On Tuesday, the euro hit $1.3792, which was its strongest level since mid-November 2011 The yen was also in demand, pushing the dollar down 0.7 percent at 97.40 yen and the euro 0.9 percent weaker at 134.09 yen. Against a basket of widely traded currencies, the dollar index was up 0.1 percent at 79.281. It fell as low as 79.137, its weakest since early February. Still the outlook for the dollar remained downbeat. Tuesday's U.S. jobs report has pushed out expectations for a reduction in the Fed's asset-buying plan well into 2014, Scotiabank's Sutton said. That left the Fed's balance sheet expanding rapidly while that of other central banks are stabilizing or contracting. A majority of U.S. primary dealers polled by Reuters now believe the Federal Reserve will not start cutting its $85 billion of monthly bond purchases until March. Strategists pointed to the Fed's Oct. 29-30 policy meeting, which could indicate whether there has been any substantial change to Fed policymakers' views on the economy. EURO STRENGTH WORRIES Strategists said if the euro's ascent gathered pace the European Central Bank could adopt some form of verbal intervention or other measures to dampen its strength. "Euro/dollar is trading at new highs for the year and the question is what will the response be from the ECB?" said Chris Turner, head of FX strategy at ING in a note to clients. "Euro zone headline inflation is low, and the ECB could repeat its February stance that the strong euro increases downside risks to inflation." He added that the ECB could hint at the need for more monetary stimulus via new Long-Term Refinancing Operations (LTRO) as it acknowledges that a "decline in excess liquidity could be pushing up money market rates." "Investors seem happy to play the weak dollar trend against the euro. $1.3710/30 looks a buy for a multi-day move to $1.3950/40."