NEW YORK (Reuters) - The euro fell to a two-year low against the U.S. dollar on Friday after a report showed U.S. employers hired at a dismal pace in June, stoking strong risk aversion and a flight to safe havens that put recent central bank interest rate cuts in stark relief.
The report appeared to fuel concerns that Europe's debt crisis is shifting the U.S. economy into low gear.
The weak U.S. jobs data came a day after the European Central Bank cut interest rates, further dampening the euro's appeal, and China and the Bank of England announced more monetary easing.
With U.S. interest rates already near zero the loosening of monetary policy in Europe and China diminishes the relative interest rate advantages held over the greenback.
"Risk premiums come down and at some point interest rates don't compensate for sovereign risk," said Paresh Upadhyaya, director of currency strategy at Boston-based mutual fund company Pioneer Investments, which has $200 billion in assets under management.
"Today's employment number, not so much that it fell short of expectations, but that the data was likely strong enough to keep the Fed at bay," he said, referring to pressure on the U.S. central bank to engage in more bond buying operations to inject cash into the economy, also referred to as quantitative easing.
While the dollar was the safe bet against the euro, investors flocked to the yen as an even safer bet than the dollar.
"You might expect the yen to gain against the U.S. dollar - as you're seeing now - as it will be the preferred safe-haven currency for today," said John Doyle, senior strategist at Tempus Consulting in Washington.
The euro fell 1 percent to a two year low of $1.2264 before rebounding to $1.2282, off 0.88 percent on the day. The dollar rose to a 1-1/2-year high against the Swiss franc.
The U.S. Labor Department said on Friday nonfarm payrolls expanded by just 80,000 jobs in June, falling short of forecasts though a tad higher than a revised May reading of 77,000. Job creation during the month wasn't enough to bring down the country's lofty 8.2 percent unemployment rate.
Against the yen, the dollar slipped 0.25 percent to 79.67 yen, off an earlier three-day low.
The euro has lost 3.08 percent against the dollar this week, and at current prices is on track for its worst weekly performance since the week ended September 11. The dollar is down 0.27 percent against the yen for the week at current prices.
"Politically and economically, it is not the environment for the euro to rally ... In a week or a month's time, it can easily get back down towards below $1.2280 and maybe even head towards $1.20," Kathleen Brooks, research director at FOREX.com said in London.
The ECB on Thursday cut its main interest rate to 0.75 percent and the deposit rate to zero, reducing the incentive to hold a currency already beset by debt problems.
Many analysts say the ECB's easing this week will lead the euro to take on the role of a funding currency - used to finance investments in higher-yielding assets - meaning it could struggle to make ground even when share prices rise.
"A weaker euro has to be one of the least costly solutions to the euro zone crisis," said Chris Turner, head of ING head currency strategy in London, adding he expected the euro to see an "orderly decline" towards $1.15 by year-end.
A Reuters poll conducted after the ECB rate cut showed economists expect more measures from the central bank in the coming months, possibly including another round of cheap, long-term loans for banks.
The euro also stayed near record lows hit on Thursday versus the Australian and New Zealand dollars.
Against the Swiss franc, the euro was at 1.2009 francs, continuing to hover just above the 1.20 floor for the euro/Swiss franc rate imposed by the Swiss National Bank last year in an attempt to keep its economy competitive.
The dollar traded up 0.85 percent to 0.9775 Swiss franc, off the fresh 1-1/2-year high of 0.9789 after the jobs data.
Many in the market believe the SNB will struggle to maintain the cap, with data on Friday showing the SNB's foreign exchange reserves jumped 19 percent in June as the euro zone crisis forced it to intervene heavily.
The higher-yielding Australian dollar was down 0.90 percent against the U.S. dollar at $1.0194, off a two-month high hit on Thursday following China's surprise interest rate cut. China is Australia's single largest export market.
Additional reporting by Nick Olivari; Editing by James Dalgleish