FOREX-Yen rally as U.S. unemployment rises above 10 pct

* Risk aversion rises after weak U.S. jobs data

* U.S. Oct payrolls fall 190,000, jobless rate 10.2 pct

* Traders reduce bets of Fed raising interest rates

* Investors also keep an eye on G20 meeting (Adds details, updates prices, adds comments)

NEW YORK, Nov 6 (Reuters) - The yen rose on Friday after a report showed the U.S. unemployment rate spiked to 10.2 percent, fueling worries about the health of the economy and boosting safe-haven demand for the Japanese currency.

The government reported U.S. employers cut a deeper-than-expected 190,000 jobs in October, driving the unemployment rate to a 26-1/2-year high. For details, see [ID:nN04495174].

The news dashed hopes the recession was ending after recent gross domestic product and jobless claims readings pointed to an economic recovery. With the labor market still weak, U.S. consumer sentiment and spending will likely remain under pressure, analysts said.

"The yen has obviously benefited ... from risk aversion," said Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston.

"The big psychological impact was from the 10.2 percent unemployment rate. It's going to cast further doubt on whether the incipient U.S. economic recovery can be sustained without further government support," he added.

The dollar fell as low as 89.62 yen, according to Reuters data, and last traded 1 percent lower at 89.85 yen . The euro declined 1.2 percent to 133.45 yen , after hitting a session low of 133.22 yen.

Analysts said the dollar also came under pressure against the yen as two-year U.S. Treasury yields eased after the jobs data. The two-year notes are most sensitive to potential changes in the Federal Reserve's monetary policy.

The prospects of prolonged, low U.S. interest rates have fueled speculation the greenback is replacing the yen as a primary funding currency in carry trades. In such trades, investors borrow in low-yielding currencies and reinvest the proceeds in currencies and assets with greater returns.

"Dollar/yen has essentially become an interest rate play," said Paresh Upadhyaya, portfolio manager at Putnam Investments in Boston. "With interest rate differentials narrowing further against the dollar, you're seeing dollar/yen under pressure."

WORST OF BOTH WORLDS

Daniel Katzive, currency strategist at Credit Suisse in New York, said the jobs numbers were not weak enough to call into question a global recovery story, but were weak enough to keep the markets thinking the Fed will be on hold for some time.

"It's the worst of both worlds for the dollar," he said.

Traders reduced their bets the Fed will begin raising rates in the middle of next year. The implied chances of the Fed's first rate hike by the mid-2010 slipped to about 66 percent from 84 percent late on Thursday. [ID:nNYE002745].

Despite the rise in risk aversion, the dollar, which has been viewed as a safe-haven currency, traded little changed against a basket of six major currencies. The ICE Futures U.S. dollar index was last at 75.747 .

The euro last traded down 0.2 percent at $1.4847 , near a session low at $1.4815, according to Reuters data. The euro briefly erased all losses versus the dollar to hit a session high of $1.4913 as U.S. stocks rebounded.

Higher-yielding, commodity-linked currencies such as the Australian and New Zealand dollars rose versus the greenback.

The Aussie dollar was up 0.6 percent at US$0.9166 and the New Zealand currency gained 0.4 percent to US$0.7245 .

A meeting of the Group of 20 finance ministers and central bankers in Scotland on Friday and Saturday, is also in focus with traders, although discussions on currencies are not on the formal agenda. (Editing by Leslie Adler)