* Risk appetite increases; yen, Swiss franc under pressure
* U.S. payrolls fall less than expected in August
* U.S. service sector activity growth slows in August (Updates prices, adds quotes, details, changes byline)
By Aleksandra Michalska
NEW YORK, Sept 3 (Reuters) - The U.S. dollar fell against most foreign currencies on Friday after a surprisingly strong non-farm payroll report eased worries about the economy and boosted the appetite for riskier assets.
The safe-haven yen and Swiss franc weakened broadly, while higher-yielding currencies such as the Australian dollar gained as expectations grew that the health of the U.S. labor market may not be as poor as many had feared.
U.S. non-farm payrolls fell by 54,000 in August, the Labor Department said, well below expectations for a decline of 100,000. And private employment, considered a better gauge of labor market health, increased more than had been forecast. For details, see [ID:nN02227856]
"Today's employment number was encouraging," said Kevin Chau, FX strategist at IDEAglobal in New York. "But I think the market is still looking for more signs that we are not heading towards double dip."
Optimism about the economy, however, faded slightly after separate data showed the U.S. non-manufacturing sector grew more slowly than expected in August and the sector's employment shrank.
The ICE Futures U.S. dollar index .DXY, which tracks the greenback versus a basket of six currencies, last fell 0.5 percent to 82.052.
Stephen Butler, director of forex trading at Scotia Capital in Toronto, expects further dollar weakness in the near term as risk appetite stays supported.
The euro traded at $1.2884 EUR=, up 0.5 percent. Against the yen, it gained 0.6 percent to 108.69 yen EURJPY=.
While the jobs report may mitigate fears of a double-dip recession, some analysts cautioned that the U.S. economy is still in for a slow recovery.
"Just as trading on the bad U.S. data recently was overdone, I think sentiment on this week's positive reports is also going to be overdone," said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank in New York. "You have a lot of people unemployed, so it's a long way back to normal."
The dollar earlier rallied more than 1 percent against the yen to a session high of 85.22 yen after the jobs data JPY=, according to Reuters data. It pared most gains after the weaker-than-expected services data from the Institute for Supply Management, and last traded up 0.2 percent at 84.42 yen.
The dollar hit a 15-year low of 83.58 yen on electronic trading platform EBS late last month on fears the U.S. economic recovery was stalling.
IDEAglobal's Chau said the dollar/yen may still try to dip below 80 and traders will likely continue to pay close attention to the risk of currency intervention by Japanese authorities to weaken the yen.
The euro rose to 0.9 percent against the Swiss franc EURCHF= to 1.3114 francs, off from an all-time low around 1.2850 earlier this week. The dollar was up 0.4 percent at 1.0170 francs CHF=.
The increase in risk appetite lifted commodity currencies. The Australian dollar hit about four-week highs against the dollar to US$0.9175 AUD=, while the New Zealand dollar rose to a more than three-week high at US$0.7218 NZD=. The Canadian dollar advanced to a two-week high, with the greenback falling 1.3 percent to last trade C$1.0399 CAD=. (Additional reporting by Nick Olivari and Steven C. Johnson; Editing by Leslie Adler)