By Saikat Chatterjee
LONDON, Oct 4 (Reuters) - The dollar steadied on Friday but was on track to post its first weekly drop in a month before monthly U.S. jobs data as weak data this week raised concerns the U.S. economy was losing momentum and could potentially undercut the greenback's rally.
The dollar index .DXY fell 0.1 to 98.79, shedding about 1% after hitting a 2-1/2-year high this week. It is down 0.3% on the week, its biggest weekly loss since the week of Sept. 9.
"Should today's NFP report confirm that the U.S. economy is losing its domestic demand strength, dollar weakness experienced from Monday’s high could broaden out, finding its best expression in short dollar/yen and long euro/dollar," Morgan Stanley strategists said in a note, referring to the U.S. Labor Department's non-farm payrolls report.
The euro, which had been dogged by concerns Germany could slip into a recession, rose 0.1% to $1.0970 EUR=EBS, extending its recovery from a near 2-1/2-year low of $1.0879 set on Tuesday.
On Thursday, a survey from the U.S. Institute for Supply Management (ISM) showed its non-manufacturing activity index falling to 52.6 in September, the lowest since August 2016 and down from 56.4 in August. It was also far below expectations of 55.0.
Coming on the heels of a similar ISM survey on Tuesday on manufacturing showing activity plunging to more than 10-year lows, the weak data increased fears of a U.S. recession.
The U.S. service sector, backed by firm U.S. domestic consumption, has been one of few bright spots in the global economy as the manufacturing sector worldwide has been knocked by the protracted U.S-China trade war.
That does not bode well for the upcoming all-important U.S. jobs data on Friday, said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank, noting the employment component in the ISM has had a meaningful correlation with the payrolls data.
The median forecast by economists polled by Reuters for the payrolls data at 1230 GMT points to a rise of 145,000 in September, a tad below the average over the last 12 months around 173,000.
"A weak figure could cause the Fed to change its characterization of the labor market as 'strong,' which would give them more reason to ease," said Marshall Gittler, chief strategist at ACLS Global.
Elsewhere, the Australian dollar AUD=D3 and the New Zealand dollar NZD=D3 held near the day's highs thanks to broad dollar weakness.
(Reporting by Saikat Chatterjee; Editing by Peter Graff and Chizu Nomiyama)
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