FOREX-Yen gains broadly on political tensions in Egypt and Portugal
* Euro hits five-week low versus dollar on Portugal political turmoil
* ADP shows more jobs created than expected in U.S. private sector
* U.S. jobless claims fall for 2nd straight week
NEW YORK, July 3 (Reuters) - The safe-haven yen reigned supreme on Wednesday as political instability in Egypt and Portugal prompted investors to seek refuge in the Japanese currency, although it did trim gains against the dollar after data showed a stabilizing U.S. labor market.
The yen was broadly supported by worries about Egypt, where the army commander and Islamist President Mohamed Mursi each pledged his life to defy the other and thousands are demonstrating. prompted by mass demonstrations. Oil hit a 14-month peak because investors were concerned that tensions could destabilize the Middle East region and cause disruptions in crude supply.
Political turmoil in Portugal also underpinned the yen against the euro, which fell after four straight days of gains. The resignation earlier this week of two ministers threatened to force an election over budget austerity, risking Portugal's goal of exiting its 78-billion-euro bailout and returning to regular bond markets next year.
Nick Bennenbroek, head of currency strategy at Wells Fargo Securities in New York, said that the "unresolved situation in Egypt and the government resignations in Portugal are an issue. We're not only seeing some of the G10 currencies weaken, but also emerging market currencies."
The dollar, however, did get a modest reprieve against the yen following data showing the U.S. private sector created more jobs than expected in June, adding 188,000 positions, while U.S. initial weekly jobless claims fell for a second straight week.
The reports boded well for Friday's U.S. non-farm payrolls data and more importantly affirmed a growing conviction the Federal Reserve will scale back its quantitative easing (QE) program sooner than expected.
"The U.S. labor market numbers do signal a better number for Friday's employment report and just add to the QE tapering message and that's positive for the dollar," said Greg Moore, currency strategist, at TD Securities in Toronto.
A U.S. service sector report for June, however, was far from stellar, showing growth at the slowest pace in more than three years. The Institute for Supply Management's services index fell to 52.2 last month from 53.7 in May, short of economists' forecasts for a gain to 54.
Investors, however, took comfort from the survey's employment gauge which rose to 54.7 from 50.1 in May. That should further add to optimism about Friday's U.S. non-farm payrolls report, which is expected to show job gains of 165,000 last month and an unemployment rate of 7.5 percent.
In midday New York trading, the dollar fell 0.8 percent to 99.75 yen, slightly recovering from the day's lows of 99.24 yen. The euro was also hit, down 0.6 percent at 129.75 yen .
Europe's common currency earlier hit a five-week low against the dollar after political tension in Portugal pushed up the borrowing costs of lower-rated euro zone countries. The euro fell to $1.2921, its lowest since late May. But it recovered to trade at $1.3006, up 0.2 percent on the day.
Portuguese 10-year bond yields topped 8 percent and equities slid as media reports said two more government ministers were ready to resign after the finance and foreign ministers quit earlier this week.
In midday trading, however, Portugal's ten-year yields fell to 7.525 percent, from a peak of 8.195 percent, their highest level since late November.
Spanish and Italian yields also rose on worries the euro zone was set for another round of instability.
Meanwhile, the dollar index, which measures the currency's value against a basket of currencies, fell 0.4 percent to 83.241, off an earlier five-week peak of 83.717.
Traders were cautious before a U.S. Independence Day holiday on Thursday that could spark volatile movements due to low volumes.
Expectations the Fed will scale back stimulus while other central banks are more likely to ease policy are expected to support the dollar.
In other currencies, the higher-yielding Australian dollar slid to a near three-year low of US$0.9052 after Reserve Bank of Australia Governor Glenn Stevens said he was surprised by the resilience of the currency.
The Aussie dollar last traded at US$0.9082, down 0.7 percent on the day.