Dollar weakens after U.S. jobs data suggests slower rate hike path

NEW YORK, March 10 (Reuters) - The dollar weakened on Friday after U.S. labor data for February showed slower wage growth, suggesting an easing of inflation pressures may keep the Federal Reserve's pace of interest rate hikes modest and thereby reduce the greenback's appeal.

The U.S. economy added jobs at a brisk clip in February, but slower wage growth and a rise in the unemployment rate prompted financial markets to dial back expectations for a 50-basis point rate hike when Fed policymakers meet in two weeks.

Congressional testimony earlier in the week by Fed Chairman Jerome Powell was seen as hawkish and strengthened the dollar as Treasuries pay more in yield than other government debt.

The dollar slid against all major currencies, but was essentially flat against the Canadian dollar. The dollar index , a basket of trading currencies, fell 0.618%.

Adding to the plunge in Treasury yields was the closing of SVB Financial Group (SIVB.O), the largest bank failure since the financial crisis, as California regulators moved quickly to protect depositors at the startup-focused lender.

The yield on benchmark 10-year Treasury notes fell more than 22 basis points to under 3.70% in the biggest single-day drop in four months. Bond yields move opposite to their price.

"There is a significant, in my opinion anyway, safe-haven bid going on," said Kevin Flanagan, head of fixed income strategy at WisdomTree. "There are concerns about potential banking stress."

Average hourly earnings for all private workers rose 0.2% versus 0.3% in January, and lifted the year-on-year figure to 4.6%. Economists expected hourly earnings to rise 0.3% in February, which would have raised wages by 4.7% annually.

The dollar may be range-bound as slowing inflation to the Fed's target of 2% is likely to be bumpy, said Joe Manimbo, senior market analyst at Convera in Washington.

"When the market revises up expectations for peak rates, we see the dollar take two steps up. But once the dust settles, we see the dollar take a step back," Manimbo said.

"The market already anticipates that the Fed is going to pause this year, but exactly when it's just unknown."

Futures for fed funds slid to a 41% chance of a 50 bps hike when Fed policymakers meet on March 22, compared with a 71.6% probability a week ago, according to CME's FedWatch Tool.

The market got ahead of itself on the prospect of a 50 basis-point hike at the next Fed meeting, said Dec Mullarkey, managing director of investment strategy and asset location at SLC Management in Boston.

"Rate hikes of 25 basis points at this point make more sense as it allows the Fed to keep tightening but extend the period over which they do it to allow the data to catch up," he said.

The euro rose 0.57% to $1.064 and Sterling traded at $1.2024, up 0.83% on the day.

The "quite important" consumer price index (CPI) scheduled for release on March 14 is now front and center, said Andrzej Skiba, head of the BlueBay U.S. fixed income team at RBC Global Asset Management in New York.

"The focus now moves on to the CPI print and the overall financial conditions given what's happening in the banking space in the U.S.," he said.

The Japanese yen strengthened 1.01% to 134.79 per dollar.

The dollar earlier jumped against the yen in a knee-jerk move after the Bank of Japan kept policy unchanged in Governor Haruhiko Kuroda's last policy meeting before he steps down in April.

While the "no surprises" decision was expected by most market-watchers, many see the days of the BOJ's bond yield curve control (YCC) as numbered, which led to some pricing in a slim chance of a policy tweak at Kuroda's last policy meeting.

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Currency bid prices at 3:45PM (2045 GMT)