FOREX-Dollar drops as Fed stimulus seen staying after jobs data

* U.S. economy adds 148,000 jobs, fewer than expected

* Data drives expectations of Fed maintaining stimulus

* Labor participation rate adds to expectations on stimulus

By Julie Haviv

NEW YORK, Oct (KOSDAQ: 039200.KQ - news) 22 (Reuters) - The dollar slid across the

board on Tuesday, hitting its lowest level against the euro in

nearly two years, as disappointing U.S. jobs data emboldened

expectations that the Federal Reserve will leave its stimulus

unchanged for the remainder of the year.

The greenback hit an eight-month trough against a basket of

currencies after data showed U.S. employers added far fewer

workers than expected in September, suggesting a loss of

momentum in the economy.

The data will likely add to the Fed's caution in deciding

when to trim its monthly bond purchases. The Fed's bond buying

is negative for the dollar as it is tantamount to printing

money.

The dollar also swooned against the safe-haven Swiss franc

and higher-yielding Australian dollar, dropping to a 20-month

trough and a 4-1/2-month low, respectively.

U.S. nonfarm payrolls increased by 148,000 workers last

month, the Labor Department said. While the job count for August

was raised, employment gains in July were revised lower and were

the weakest since June 2012.

Economists were expecting U.S. job gains of 180,000 in

September, which preceded the 16-day government partial shutdown

in October. With the shutdown expected to have damaged the U.S.

economy, the conviction that the Fed will not reduce its asset

buying any time soon became even more entrenched.

"Is the Fed getting tired of being right? Today's

underperforming jobs number fully justifies September's cautious

FOMC," said Joseph Trevisani, chief market strategist at

WorldWideMarkets in Woodcliff Lake, New Jersey.

"Full-bore quantitative easing will probably be with us

through the first quarter and speculation for an increase may be

no further than another weak payroll."

In afternoon trading, the euro hit a high of $1.3792

against the dollar, its strongest level since mid-November 2011.

It was last at $1.3788, up 0.8 percent on the day.

The dollar index, a gauge of the dollar's value

against six major currencies that is dominated by the euro, fell

to its weakest in eight months at 79.182. The index last traded

at 79.196, down 0.6 percent.

The unemployment rate did dip to 7.2 percent last month, the

lowest since November 2008, but the expected toll of the

government shutdown on the economy eclipsed any signs of

strength.

Economists estimated that the government shutdown shaved as

much as 0.6 percentage point off annualized fourth-quarter gross

domestic product growth through reduced government output and

damage to both consumer and business confidence.

The labor participation rate in September held fast at a

35-year low, unchanged at 63.2 percent.

"A 35-year low in the participation rate indicates that the

recent improvement in the unemployment rate has been influenced

in no small way by discouraged workers leaving the labor force,"

said Michael Woolfolk, global market strategist at BNY Mellon in

New York. "This report clearly reduces the likelihood of

tapering."

Against the yen, the dollar fell as low as 97.86 yen.

It last traded at 98.04 yen, down 0.2 percent on the day.

Following the September jobs report, futures prices

suggested that the Fed will raise interest rates no earlier than

April 2015, giving a 54 percent probability of an increase that

month, according to CME Group (Kuala Lumpur: 7018.KL - news) 's Fed Watch. Fed Watch generates

probabilities based on the price of Fed funds futures traded at

CME Group Inc (NasdaqGS: CME - news) 's Chicago Board of Trade.

Before the report, traders were giving a 59 percent

probability for an April 2015 rate rise.

Chicago Fed President Charles Evans said on Monday it would

be "tough" for the U.S. central bank to have enough confidence

in the economy by its December meeting to start scaling back

stimulus.

Indeed, the fiscal deal clinched last week by U.S. lawmakers

only restored government funding until Jan. 15.

Against the Swiss franc the U.S. dollar hit a 20-month low

of 0.8937 franc. It was last at 0.8942 franc, down 0.9

percent.

The Australian dollar climbed to a 4-1/2-month peak against

the greenback at US$0.9730. It has retraced half of its

April-to-August fall. It was last at US$0.9702, down 0.6

percent.