* U.S. payrolls gain 288,000 jobs
* ECB's Draghi affirms low rate policy; weighs on euro (Updates prices, adds comment)
By Gertrude Chavez-Dreyfuss
NEW YORK, July 3 (Reuters) - The dollar climbed to a two-week peak against the yen on Thursday after data showing the U.S. economy created far more jobs than expected last month, easing worries about its health entering the second half of the year.
The euro, in contrast, dipped to one-week troughs versus the dollar as European Central Bank President Mario Draghi affirmed the bank's low interest rate policy, citing persistent downside risks to the euro zone economy.
Thursday's events underscored the growing divergence in the outlook between the euro and dollar. The ECB is embarking on a round of stimulus measures, while the Federal Reserve is winding down its own. The U.S. non-farm payrolls report should keep the Fed on track with tapering its monthly bond purchases.
"U.S. payrolls shot the lights out and it's substantially stronger than the trend in the last three months, which is encouraging for the dollar," said Richard Franulovich, senior currency strategist, at Westpac Securities in New York.
"There is a sense of relief among U.S. economy bulls after a staggering contraction in the first quarter. This number suggests current conditions are much stronger."
U.S. non-farm payrolls increased by 288,000 jobs, the Labor Department said on Thursday. April and May numbers were revised to show a total of 29,000 more jobs created than previously reported.
In afternoon trading, the dollar was up 0.4 percent against the yen at 102.20 yen after rising as high as 102.26, a two-week peak. The dollar posted its largest daily gain in a month.
The dollar index rose to a one-week high of 80.315 and was last at 80.215, up 0.3 percent, its best day in two months.
"Overall, we're in an atmosphere of broad dollar strength," said Lennon Sweeting, corporate dealer at U.S. Forex in San Francisco. "I think we'll see the dollar rally against most of the majors. Specifically, we expect the euro to fall to $1.28 by December this year."
The euro last traded 0.4 percent lower at $1.3607, its largest daily loss in a month. Earlier, it hit a one-week low of $1.3597.
Draghi's remarks on his outlook for the euro zone and the ECB's view on currencies put a damper on the euro. Draghi said the risks facing the euro zone economy mean interest rates will stay low for an extended period.
"He stuck to the dovish script," Westpac's Franulovich said. "What was interesting was the reference to the asset purchases, which suggest that the ECB's balance sheet is set to grow dramatically."
Draghi also sent a warning signal about an extremely strong euro, saying the exchange rate is important for price stability and that the ECB is watching it closely.
(Reporting by Gertrude Chavez-Dryfuss; Editing by Dan Grebler)
- USA News