* Dollar/yen drops after Nikkei hits 7-month low
* Euro hits 4-month trough vs yen on dovish ECB
* U.S. nonfarm payrolls next key focus for markets (Updates, adds fresh quote)
By Anirban Nag
LONDON, Sept 4 (Reuters) - The dollar fell on Friday while demand for the safe-haven yen picked up as stocks weakened, with traders increasingly certain that a key U.S. jobs report due later is unlikely to push the Federal Reserve to raise rates.
Traders said a non-farm payrolls report which is in line with expectations, or even a slightly better-than-expected reading, would be unlikely to alter expectations that the Federal Reserve will not raise interest rates later this month.
For the dollar to get a boost, not only would the report have to show a huge rise above the 220,000 consensus figure, but wages too would need to register a sharp uptick, which could bring a hike this month back to the table, analysts said.
Expectations of a rate hike by the Fed in September 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 bar for a dollar-positive surprise is likely higher -- above 230,000 -- given concerns that ongoing volatility will prevent a September hike,” said Josh O‘Byrne, currency strategist at Citi. “(A reading) below 180,000 could be seen taking September off the table.”
The dollar was down 1 percent at 118.85 yen, on track for its biggest weekly loss since August 2013.
The yen also rose against the euro, which had come under broad pressure after the European Central Bank (ECB) gave a sobering assessment of the euro zone economy and suggested it may have to beef up its already massive stimulus programme.
The euro dropped to a four-month low of 132.55 yen . The single currency, though, stabilized against the dollar, rising 0.1 percent to $1.1135, supported by a steady unwinding of euro-funded carry trades as stocks struggled.
Japan’s Nikkei fell to a seven-month low, while European stocks were in the red, prompting traders to unwind carry trades, funded in the low-yielding euro and the yen. Traders said unless volatility faded, the euro would side-step the ECB’s easy monetary policy stance and continue to benefit from souring risk sentiment.
“Nowadays, volatility is too high to see euro zone-based investors exporting capital in sufficient quantities to weaken the euro. Hence, the ECB measure may limit the euro’s upside but does not open downside potential,” Morgan Stanley said in a note.
The euro hit a two-week low against the dollar on Thursday after ECB President Mario Draghi said the bank’s bond-buying programme may run beyond September 2016 and that its size and composition may be adjusted. (Editing by Catherine Evans and Mark Potter)