NEW YORK (Reuters) - The dollar fell to seven-month lows on Friday after data showed the U.S. economy created fewer jobs than expected in May, but equity investors took the news in stride and pushed leading American, British and German stock indexes to record highs.
U.S. job creation slowed last month and employment gains in the prior two months were revised lower, suggesting the labor market was losing momentum despite the unemployment rate falling to a 16-year low of 4.3 percent.
The lackluster data lifted gold prices to a six-week peak as the report lowered expectations for the Federal Reserve to raise benchmark U.S. interest rates this year after a hike that most analysts still anticipate later in June.
Nonfarm payrolls increased 138,000 in May as the government, manufacturing and retail sectors lost jobs, the Labor Department said. The U.S. economy created 66,000 fewer jobs than previously reported in March and April.
Still, investors continue to give both the economy and President Donald Trump's administration the benefit of the doubt, said Michael Arone, chief investment strategist at State Street Global Advisors in Boston.
"Should we see the earnings begin to decline, I do think the market will have trouble," he said.
The market has priced in a global growth rebound, though skepticism on the part of bond investors, a tepid market for small-capitalized stocks and a downward drift in oil prices point to sluggish growth, low inflation and low rates, he said.
"The rest is kind of this noise, the monetary policy, what's going on in DC," Arone said, referring to Washington.
Slower U.S. population growth is dragging on the economy and the rate of inflation, said Russell Price, senior economist at Ameriprise Financial Services Inc in Troy, Michigan.
Yet the broad view of the U.S. labor market is that it is still quite healthy. Initial claims for jobless benefits as a percentage of total employment have never been lower since state programs began in the 1940s, Price said.
MSCI's all-country world stock index <.MIWD00000PUS> hit a record high, rising 0.63 percent, as it posted a seventh straight week of gains and its longest winning streak since 2010.
Financial stocks in Britain lifted the FTSE 100 <.FTSE> index of top UK blue chips to all-time peaks while Germany's DAX <.GDAXI> index also set new highs. Both later trimmed gains but closed the day higher.
On Wall Street, the three major U.S. indexes closed at fresh record highs.
The Dow Jones Industrial Average <.DJI> rose 62.11 points, or 0.29 percent, to close at 21,206.29. The S&P 500 <.SPX> gained 9.01 points, or 0.37 percent, to 2,439.07 and the Nasdaq Composite <.IXIC> added 58.97 points, or 0.94 percent, to 6,305.80.
The greenback fell to seven-month lows against the euro and Swiss franc <CHF=>, while sliding to a two-week bottom versus the yen.
Analysts said the less rosy jobs data was unlikely to derail the U.S. central bank from raising rates this month.
"A hike in June is still on the table but the news flow will have to improve for the Fed to keep tightening in the second part of the year," said Thomas Julien, U.S. economist, at Natixis North America in New York.
The dollar index, tracking the unit against key foreign currencies, fell to a seven-month low and was last down 0.53 percent at 96.679 <.DXY>. The euro was 0.62 percent higher against the dollar to $1.1281 <EUR=>. Against the yen <JPY=>, the dollar fell from one-week highs and last changed hands at 110.42 yen, down 0.83 percent.
Brent crude dipped below $50 to post a second week of losses on worries Trump's decision to abandon a climate pact could spur U.S. drilling and worsen a global oil glut.
Benchmark Brent crude futures <LCOc1> fell 68 cents to settle at $49.95 per barrel. U.S. West Texas Intermediate crude <CLc1> futures settled down 70 cents at $47.66 per barrel.
Long-dated U.S. Treasury yields fell to nearly seven-month lows while short-dated yields touched their lowest in more than two weeks after the U.S. employment data suggested a cautious Fed policy beyond June.
U.S. 10-year Treasuries <US10YT=RR> rose 18/32 in price to push their yields down to 2.1539 percent.
Spot gold <XAU=> rose for a fourth straight week, up 1.02 percent to $1,278.13 an ounce, its highest since April 21. Gold futures for August delivery <GCcv1> settled up 0.8 percent at $1,280.2.
(Editing by Bernadette Baum and James Dalgleish)