* Dollar recovers vs yen, rises above 86 yen
* ADP private jobs, ISM services data help dollar
* Speculation lingers about Fed monetary policy moves
* Moves in dollar index still point to more weakness (Adds details; updates prices)
By Vivianne Rodrigues
NEW YORK, Aug 4 (Reuters) - The dollar rebounded from an eight-month low against the yen on Wednesday and rose against the euro as encouraging U.S. employment and service sector data prompted traders to unwind bets against the U.S. currency.
A private report showing the economy added 42,000 jobs last month was welcome, but traders said it would take far more good news to reverse the prevailing bias against the greenback, which has shed some 6 percent against major currencies since July. For more, see [ID:nOSL014554] and [ID:nN04237557]
"The market is still short the dollar, so you could see some covering between now and the end of the week, but this would be for the short term," said Hidetoshi Yanagihara, senior currency trader at Mizuho Corporate Bank in New York. "It's obvious the pace of U.S. growth is slowing and people are waiting to sell the dollar at better levels."
In late afternoon trading in New York, the dollar rose 0.5 percent to 86.26 yen JPY= after falling to 85.33 yen earlier, its lowest level since November. A move below 84.81 yen would mark a 15-year low, according to Reuters data.
The euro fell 0.5 percent to $1.3164 EUR=, off Tuesday's three-month high of $1.3261. The dollar was also boosted by data showing the U.S. services sector grew more than expected in July.
The U.S. currency rose 1.2 percent against the Swiss franc to 1.0522 francs CHF=, and sterling fell 0.3 percent to $1.5894 GBP=D4.
Kathy Lien, director of research at GFT Forex in New York, said the reports provided investors with a good incentive to buy back some dollar. However, she added markets are still worried recent signs of weaker U.S. growth could prompt the Federal Reserve to embrace more monetary policy easing.
The Fed's next policy meeting will be on Aug. 9.
The fears about the economy have driven U.S. short-dated Treasury yields lower in recent days, which has undermined the appeal of dollars for global investors.
Technical factors are still flashing some warning signals for the greenback. An index that measures the value of the dollar against six major currencies .DXY had closed for two straight days beneath its 200-day moving average before rising 0.4 percent on Wednesday.
Further losses in the index are still likely and a firm breach of the supports at 80.40 and 79.92, particularly on a weekly close basis, would suggest a more medium-term downtrend for the dollar to below 75, according to Reuters and Citibank data.
The 80.40-79.2 target area is the convergence of 55-200 week moving averages and horizontal supports for the index.
ALL EYES ON PAYROLLS
Lien said a strong showing from the government's more comprehensive payrolls report to be released on Friday could cause "yields to finally stop falling, which is a prerequisite for the U.S. dollar to bottom."
Economists polled by Reuters are looking for Friday's data to show an overall decline of 65,000 jobs in July but a 90,000 gain in private sector employment.
Speculation that the Fed -- the U.S. central bank -- could revive a program to buy Treasury and mortgage debt to boost growth is also likely to cap dollar gains, analysts said.
"We see further dollar weakness ahead, with the Fed making it clear its priority is to support growth," said Ulrich Leuchtmann, currency analyst at Commerzbank in Europe. (Additional reporting by Steven C. Johnson, Nick Olivari in New York and Neal Armstrong in London; Editing by Leslie Adler)