(Updates prices, adds comment)
* U.S. non-farm payrolls show big upside surprise, but wages soft
* Fed still on track to raise rates 3 times this year -analyst
* U.S. non-manufacturing index slightly lower than forecast
By Gertrude Chavez-Dreyfuss
NEW YORK, Feb 3 (Reuters) - The dollar fell on Friday in choppy trading after the U.S. employment report showed a smaller-than-expected rise in wages last month despite strong jobs gains, likely prompting the Federal Reserve to be less aggressive in raising interest rates this year.
The greenback has struggled amid concerns about the Trump administration’s preference for a weak dollar. It posted its worst January in percentage terms in 30 years.
So far this week, the trend continues to be lower. The dollar was down 2.3 percent against the yen this week, on track for its worst weekly performance since late July.
Further compounding the dollar’s anemic trend this year was Friday’s report showing that January non-farm payrolls rose by 227,000 jobs, the largest gain in four months. But the unemployment rate rose one-tenth of a percentage point to 4.8 percent and wages increased modestly, suggesting there was still some slack in the labor market that would keep inflation in check.
As a result, Fed fund futures priced in a slim chance of a rate hike in March on Friday after the jobs data, according to the CME Group’s FedWatch. Rate futures have instead priced in a June hike, with a probability of more than 60 percent.
“Tempered Fed expectations are ultimately the biggest market takeaway we get from the report,” said Marvin Loh, senior global markets strategist at BNY Mellon in Boston.
“This is not to say that we read this report as indicating a weaker employment situation, just the existence of more slack than the headline unemployment rate would point at. And the less aggressive rate hike profile feeds into a weaker dollar,” he added.
Average hourly earnings rose just 0.1 percent, lower than the market’s forecasts for a 0.3 percent increase. There was also a downward revision to the December wage growth.
In midday trading, the dollar index, which tracks the greenback versus six top currencies, slipped 0.1 percent to 99.666.
Against the yen, the dollar was down 0.3 percent at 112.46 yen. The euro, meanwhile, was up 0.2 percent against the dollar at $1.0784.
January’s U.S. non-manufacturing index also showed a reading of 56.5, slightly lower than the market’s 57.0 forecast.
However the number remained higher than the 54.9 average for the whole of 2016, according to High Frequency Economics.
”A little lower then expected, but still fairly strong, said Jim O‘Sullivan, chief U.S. economist at High Frequency Economics. “The data suggests good upward momentum.”
Reporting by Gertrude Chavez-Dreyfuss; Editing by Alden Bentley and Chris Reese