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By Gertrude Chavez-Dreyfuss

NEW YORK, March 7 (Reuters) - The U.S. dollar dropped to multi-month lows against the euro and yen on Friday after data showed the labor market in the world's largest economy slowed last month, creating fewer jobs than expected.

The report suggested that the Federal Reserve remained on track to cut interest rates multiple times this year. U.S. rate futures on Friday priced in 78 basis points (bps) of easing this year following the nonfarm payrolls report, or about three rate cuts of 25 bps each, according to LSEG calculations. The first rate reduction is likely to resume in June.

The euro, on the other hand, continued its winning ways, poised for its best week in 16 years with a gain of 4.6% against the dollar, boosted by Germany's game-changing fiscal reforms. It hit another four-month peak of $1.0888 after the jobs data. It last traded at $1.0863, up 0.7% EUR=EBS.

BofA Global Research raised its year-end forecast for the euro to $1.15, from $1.10 previously.

Against the Japanese currency, the greenback slid 0.2% against the yen to 147.65 yen JPY=EBS, after earlier falling to a five-month low of 147.05 yen.

Nonfarm payrolls increased by 151,000 jobs last month after rising by a downwardly revised 125,000 in January, according to the Labor Department's Bureau of Labor Statistics. Economists polled by Reuters had forecast payrolls gaining 160,000 jobs after a previously reported 143,000 rise in January.

"Friday's jobs report was weaker than expected, which is concerning because this report doesn't account for the recent government job cuts from DOGE, so it suggests that businesses are taking a pause on hiring until there is more certainty about tariff policy and the economic outlook," said Glen Smith, chief investment officer, at GDS Wealth Management in Flower Mound, Texas, in emailed comments. The firm has $1.2 billion in assets.

The dollar index =USD, which measures the greenback's value versus six major currencies, has fallen 3.5% this week, on track for its worst weekly performance since November 2022. It fell 0.4% on Friday to 103.72, after earlier sliding to its lowest since early November.

Natalia Lojevsky, managing director, at CIFC Asset Management, with $44 billion in assets under management thinks "the softer average hourly earnings is probably a relief for the Fed, who continue to evaluate inflationary pressures both in the labor market and broader economy as a result of the yet uncertain trade and tariff policy."

Last month's average hourly earnings, a measure of wage inflation moderated to a 0.3% rise, from an 0.5% increase in January. On a year-on-year basis, average earnings slipped to 4% from 4.1% the previous month.

Overall, it has been a volatile week for the currency market, driven mainly by U.S. trade and economic growth uncertainties and a pivotal development in Europe as its largest economy abandoned its fiscal constraints to boost spending and revive growth.

Treasury Secretary Scott Bessent said on Friday that the U.S. economy may slow as it transitions away from public spending towards more private spending, calling it a "detox period" needed to reach a more sustainable equilibrium.

Bessent said he thought that some level of tariffs was going to be needed permanently given the high level of economic imbalances around the world and the need for more secure supply chains.

Another reprieve of levies aimed at Mexico and Canada announced by U.S. President Donald Trump on Thursday offered little relief to whiplashed markets.

The greenback rose 0.3% against the Canadian dollar CAD=D3 to C$1.4351, but was little changed versus the Mexican peso MXN= at 20.284 pesos.

The exemption expires on April 2 when Trump said he will impose reciprocal tariffs on all U.S. trading partners.

The dollar has "fallen out of favour" amid the uncertainty, with the perceived inflationary impact of tariffs no longer enough to support it, said Kieran Williams, head of Asia FX at InTouch Capital Markets.

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Yadarisa Shabong in Bengaluru, Brigid Riley in Tokyo, and Rae Wee in Singapore; Editing by Marguerita Choy and Louise Heavens)

((gertrude.chavez@thomsonreuters.com; 646-301-4124))