The dollar slumped to two-month lows against major currencies yesterday after news of modest US jobs growth in July reinforced views that the Federal Reserve will pause in its rate-raising campaign at its meeting next week.

An end to Fed tightening would erode the yield advantage of the dollar, especially as other central banks, including the European Central Bank and the Bank of Japan, move toward more restrictive monetary policy.

US employers added just 113,000 jobs last month, less than economists had forecast, and the unemployment rate unexpectedly rose to 4.8 per cent from 4.6 per cent, the data showed.

"The (jobs) number was negative for the dollar, with the rise in the unemployment rate the most negative for the currency as it suggests there may be more slack in the labour market than originally thought," said David Mozina, senior vice-president of currency research at Lehman Brothers in New York.

"This makes a pause all but likely on Tuesday as the Fed has been looking for an excuse to pause and the market will allow them to do so credibly," said Mr Mozina.

Perceived chances of a rate hike by the Fed's federal open market committee next week, as indicated by fed funds futures, fell sharply to less than 20 per cent after the data from about 43 per cent before the release.

Economists had expected nonfarm payrolls to rise 142,000 in July and the jobless rate to hold steady.

Mid-morning in New York, the euro rose to a two-month high around $1.2908, up 0.7 per cent on the day and over a cent higher than pre-data levels.

The dollar also fell to a two-month low against a basket of currencies, with the dollar index sliding to 84.43, while sterling rose to a 15-month high above $1.91, up more than 1 per cent on the day.

The dollar fell 0.6 per cent against the yen to 114.31 yen and 0.8 per cent against the Swiss franc to around 1.22 francs. Several analysts and traders said it was only a matter of time before the euro passed the psychologically important $1.30 level.