(Updates prices, adds quotes)
By Lucia Mutikani
NEW YORK, Dec 7 (Reuters) - The dollar rose against the yen on Friday as a slightly above-forecast jobs report eased some concerns that a housing slump had spread to the broad economy and reduced chances of an aggressive Fed interest rate cut.
Analysts said it was now certain the Federal Reserve would lower its benchmark overnight lending rate by only 25 basis points to 4.25 percent next Tuesday rather than half a percentage point as the economy was not falling off a cliff.
"When you look at details of the employment report, it's showing signs that the U.S. is not in any immediate danger of going into recession. So the justification for a 50-basis-point rate cut is not there," said Paresh Upadhyaya, currency analyst at Putnam Investments in Boston.
While a quarter-point easing would still reduce the allure of dollar-denominated assets, analysts said a deeper cut would cause investors to worry more about the economy's prospects than they already were.
Rate futures are factoring in a roughly 41 percent perceived chance of a 50-basis-points interest-rate cut from 47 percent on Thursday and 65 percent a week ago. A quarter-point reduction has been fully priced in.
In late New York trade, the dollar traded 0.4 percent higher against the yen at 111.68 yen <JPY=>. The dollar eased against the euro, which continued to draw support from European Central Bank President Jean-Claude Trichet's hawkish inflation comments on Thursday.
The euro last traded 0.1 percent higher at $1.4652 <EUR=> after a brief drop following the payrolls data. It rose 0.5 percent to 163.66 yen <EURJPY=>.
Volume was light with some traders reluctant to take positions into the weekend and ahead of the policy-setting Federal Open Market Committee meeting.
"A rate cut could in fact prove to be a dollar-positive factor in the near term with the Fed being seen as not as far behind the curve as previously assumed," strategists at BNP Paribas said in a research note.
"However, if the Fed does not view the labor market data as weak enough to cut rates, this could prove to be dollar negative, increasing the U.S. recession risks for next year, implying that more aggressive rate cuts would be required next year."
Optimism that Fed rate cuts would help the economy avoid recession has seen investors briefly shift focus away from the dollar's narrowing yield advantage in favor of growth, giving the greenback some reprieve in recent days.
The euro got a boost on Thursday, recovering from three-week lows versus the dollar, after Trichet warned of strong upward pressure on inflation and said some euro zone central bankers had wanted a rate rise from the current 4 percent.
A surprisingly strong Canadian jobs report boosted the Canadian dollar against the U.S. currency, recouping some losses triggered by an unexpected interest rate cut this week. The dollar last traded down 0.3 percent at C$1.0052 <CAD=>.
U.S. employers added 94,000 jobs in November and the jobless rate held steady at 4.7 percent, the Labor Department said. Economists polled by Reuters had expected the economy to add 90,000 jobs last month. For details, see [ID:nN06211452].
In another report, U.S. consumer sentiment fell for a third straight month in early December. [ID:nN07303972]. (Editing by James Dalgleish)