* Positioning limited ahead of Friday's U.S. jobs data
* Smooth Spanish auction, German data boosted euro earlier
* Dollar selling may be running out of steam (Adds details, updates prices)
By Vivianne Rodrigues
NEW YORK, Aug 5 (Reuters) - The dollar edged lower versus the euro on Thursday, as investors avoided building large positions a day ahead of a U.S. payrolls report that markets hope will offer fresh insight on the state of the economy.
After selling the dollar aggressively earlier this week, investors were unwinding some bets against it Thursday in case the government's monthly payrolls report on Friday shows a surprisingly strong jobs gain.
A strong payrolls report would reduce the chances of the Federal Reserve mentioning additional stimulus in its policy statement after its upcoming meeting on Tuesday and could help create a near-term top in euro/dollar after a recent rally in the single currency, analysts said.
"Traders may be anxious to take... positions ahead of payrolls," said Jessica Hoversen, a fixed-income and forex analyst at MF Global Inc in Chicago.
"If payrolls are poor, then trepidations may increase over the possibility of the Fed engaging in more quantitative easing," she said.
Analysts polled by Reuters expect the United States lost 65,000 jobs in July, but added 90,000 in the private sector. An independent report from payrolls processor ADP Employment Services earlier this week said the private sector added 43,000 jobs in July.
In late afternoon trading in New York, the euro was up 0.1 percent at $1.3174 EUR=. Earlier it rose to $1.3234 after the U.S. Labor Department reported a surprise 19,000 rise in the number of Americans filing for initial jobless benefits last week.
Strong German industrial data and signs that Spain and Greece were making progress in trimming budget deficits earlier lifted the euro.
A smooth debt auction in Spain and a vote of confidence from the International Monetary Fund in Greece's efforts to cut its deficit also boosted euro buying during European trade. For more details, see [ID:nLAG006364] and [ID:nLDE6740CM]
Both countries were at the forefront of a euro zone debt crisis that drove the currency below $1.19 in June, its worst showing since 2006.
Against the yen, the dollar fell 0.6 percent to 85.75 yen JPY=, just over a yen off a 15-year low, while sterling was nearly flat at $1.5881 GBP=D4 after hitting a six-month high above $1.59 this week.
U.S. GROWTH FEARS OVERDONE?
Recent signs of slower U.S. growth have hobbled the dollar; since July, it has lost about 6 percent against a basket of major currencies. It fell this week along with short-dated U.S. Treasury yields amid speculation the Fed could revive Treasury and mortgage bond purchase to boost growth.
Steven Butler, head of currency trading at Scotia Capital in Toronto, said it appears traders "overreacted," adding that the Fed "has been pretty clear that it's done acting for now."
Butler said if the euro closes below the $1.3125 area, which marks the 38.2 percent retracement of the euro's November-to-June decline, "you'll see anyone who bought short-term Treasuries looking for the exit, and that means the euro heads back toward $1.30 and sterling toward $1.55."
Currency strategists at Standard Chartered said in a note to clients Thursday that investors should use current dollar weakness "to renew underweight positions in European currencies such as the euro and sterling," noting that September debt rollovers and the start of Britain's fiscal tightening will hurt those two currencies. (Additional reporting by Steven C. Johnson and Nick Olivari in New York; Editing by Leslie Adler)