Market LookBeck II

(Reuters) - The dollar came off its low to trade little changed against the euro on Thursday as resilience in the U.S. labor market allayed some concerns about the economic recovery, with many analysts expecting more gains ahead for the greenback.

With the state of the labor market a key factor for U.S. Federal Reserve policy, the dollar recovered and even traded higher at one point after data showed the number of Americans filing new claims for unemployment benefits fell last week.

The data offered reassurance that the bottom is not falling out of the labor market despite signs of slower growth.

It also appeared to offset recent signals that economic activity softened in March and early April, a phenomenon that economists have dubbed the spring swoon because it has happened during the past two years.

Orders for durable goods marked their biggest drop in seven months in March, and despite the fall in the latest weekly jobless claims, the U.S. labor market is still sluggish and retail sales have been weak, which could keep the Federal Reserve's ultra-loose policy firmly in place.

The Federal Reserve will likely discuss the string of weak data at its policy meeting next week. Expectations that the European Central Bank may opt to cut interest rates has kept the euro under pressure. Senior sources involved in the deliberations have told Reuters that momentum is building for monetary action to help the recession-hit euro zone.

"Part of the euro decline is technical and cross rate related, with the inability for it to hold above $1.31 and also a little spillover from euro/sterling price action," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington D.C.

The euro last traded at $1.3016, flat on the day but not far from a low of $1.2954 struck a day earlier after a German survey of business morale came in weaker than expected.

Expectations that the European Central Bank may opt to cut interest rates have kept the euro under pressure. Senior sources involved in the deliberations have told Reuters that momentum is building for monetary action to help the recession-hit euro zone.

Signs that two months of political gridlock in Italy may be coming to an end were seen as positive for the euro, but not enough to offset the impact of an ECB interest rate cut.

"There is not much of an appetite to buy the euro above $1.31 and recent German data has raised expectations of an ECB rate cut at its next meeting, so there is limited upside for the euro," Esiner said.

Investors also remain wary of the U.S. economic recovery, with gross domestic product data, scheduled for Friday, likely to garner a lot of attention.

"All eyes now look ahead to Friday's first-quarter growth figures," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington D.C. .

STERLING RALLIES

A better-than-expected performance by the British economy saw the pound jump to a two-month high against the dollar . Sterling also hit a three-week peak against the euro .

Britain avoided recession in the first quarter, wrong-footing some bearish investors, who had expected a weak number that would push sterling lower. The data watered down expectations that the Bank of England will add to its asset-buying program to underpin the economy.

Sterling rose 1.1 percent to $1.5436. The euro fell 1.1 percent to 0.8432 pence.

The dollar last traded at 99.37 yen, down 0.1 percent on the day, according to Reuters data, again struggling to climb past 100 yen - last seen in April 2009.

Data on Thursday from Japan's Ministry of Finance on weekly capital flows showed that Japanese investors remained net sellers of foreign bonds.

Investors have been closely watching flow data for any indication that the Bank of Japan's massive stimulus has pushed Japanese investors to seek higher returns overseas.

"The strength seen by (the yen and sterling) can simply be summed up as shifting expectations around their respective central banks' policies, in light of the fact that the UK economy is stronger than previously thought, while the Bank of Japan is unlikely to implement any other drastic easing steps when it announces its policy decision tomorrow," said Christopher Vecchio, currency analyst at DailyFX in New York.

Some USD4.9 billion in euros changed hands on Thursday, using Reuters Dealing data, compared with USD4.615 billion the same day a week ago. USD2.03 billion in yen trades, compared with USD2.832 billion on Thursday last week, using Reuters Dealing data.