FOREX-Yen gains on Egypt, Portugal tensions; focus on ECB, jobs data
* ADP shows more jobs created than expected in U.S. private sector
* U.S. jobless claims fall for 2nd straight week
* Euro hits five-week low versus dollar on Portugal woes
* Focus shifts to ECB meeting and U.S. payrolls data
NEW YORK, July 3 (Reuters) - The safe-haven yen was the currency darling on Wednesday as investors sought its refuge amid political instability in Egypt and Portugal, although encouraging U.S. labor market signs had it paring gains against the dollar.
Japan's currency and the Swiss franc, which is also favored during times of turmoil, were supported by worries about unrest in Egypt. Fears it could destabilize the Middle East and lead to supply disruption pushed oil to a 14-month peak.
In Europe, Portugal's president summoned main political parties for crisis talks over the government's future with markets reeling on fears that a snap election could interfere with Lisbon's exit from an international bailout.
"International developments are having an effect in the currency market and that's why the yen is higher," said Nick Bennenbroek, head of currency strategy at Wells Fargo Securities in New York.
"Obviously, 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, 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.
Nevertheless, while the labor market data was positive, a U.S. service sector report for June was far from stellar, showing growth at the slowest pace in more than three years. Investors, however, took comfort from the survey's employment gauge, which rose.
Friday's U.S. non-farm payrolls report is expected to show job gains of 165,000 last month and an unemployment rate of 7.5 percent.
In early afternoon New York trading, the dollar fell 0.5 percent to 100.10 yen, sharply recovering from the day's low of 99.24 yen as Portuguese bond yields came off their highs.
The euro also recouped losses to last trade down 0.3 percent at 130.24 yen, far above the day's trough of 128.60 yen.
The euro fell to $1.2921, its lowest since late May, but last traded up 0.2 percent at $1.3008.
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.
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 at 83.246 , off an earlier five-week peak of 83.717.
The U.S. stock market closed at 1 p.m. (1700 GMT) and the Treasury market will close early at 2 p.m. (1800 GMT), with both remaining closed on Thursday in observance of the U.S. Independence Day holiday.
Thin trading could make for volatile trading in the coming days, with a European Central Bank and Bank of England meetings on Thursday.
The dollar should rally on Friday on a strong U.S. jobs report as it will cement expectations that the Fed will scale back stimulus at a time when other central banks are more likely to ease policy. The dollar should sell off, however, should the data show tepid jobs growth.
In other currencies, the higher-yielding Australian dollar slid to a near three-year low of US$0.9049 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$0.9092, down 0.6 percent on the day.
Against the Swiss franc, the dollar fell 0.4 percent to 0.9468 franc and the euro fell 0.2 percent to 1.2314 francs.