* Dollar steadies after biggest daily fall since Feb. 4
* Risks balanced ahead of payrolls numbers
* Return of carry trade hurts euro ahead of ECB meeting
* Canadian dollar up 9 percent in two months
* China's parliament meeting starting Saturday also eyed (New throughout after start of European trade)
By Patrick Graham
LONDON, March 4 The dollar recovered from its biggest daily fall in a month in European trade on Friday, soft service sector employment data keeping markets on edge ahead of official U.S. jobs numbers due later in the session.
The U.S. currency has gained steadily against the euro in the past month, helped by a revival of interest-rate carry trades which borrow in euros to buy other currencies with higher market interest rates.
A solid payrolls reading on Friday would be likely to support the dollar further, even if some analysts warned that a bullish number that supported rises in U.S. interest rates also had the potential to unnerve stock and bond markets.
"While the latest run of data has been surprisingly strong, we suspect that markets may still be waiting for some 'Eureka!' moment before formally adopting a more bullish US view," ING strategist, Viraj Patel, said.
"Today's labour market report might just provide this."
The dollar gained 0.2 percent against both the euro and a basket of currencies in Europe. After Thursday's 0.8 percent fall, at $1.0941 it is broadly flat on the week.
While Friday's focus is firmly on the U.S. non-farm payrolls report, some traders and analysts said the euro would also draw support from the perception that very aggressive policy easing by the European Central Bank (ECB) next week is priced in.
"Too much is being priced in to the euro for the ECB," BNP Paribas strategist, Sam Lynton Brown, said.
"Even if they were to cut by 20 basis points and introduce tiering of rates, it would be hard for the euro or the bond market to go further than where they are. We think there is a risk that the euro bounces. Our top way to play this is buying the euro against the yen."
In addition to the U.S. jobs data, events in China were also in focus with the National People's Congress (NPC) - an annual meeting of the country's parliament - kicking off on Saturday.
Investors will study how China will try to steer a slowing economy as Beijing finalises its plan for development over the next five years.
"China is caught in a dilemma as it wants to support the economy by monetary easing, but this weakens the yuan and causes an outflow of capital," IG Securities forex analyst, said Junichi Ishikawa, said.
"The NPC will be watched closely to see if China comes up with comprehensive steps, including fiscal spending. Currencies will be affected as risk sentiment will improve or worsen depending on China's steps."
Stock markets have generally been in more bullish form since the end of February and that has benefitted commodity and growth-linked currencies such as the Canadian and Australian dollars. Any signs from China - or indeed the United States - that lead to further falls for the yuan would be liable to shake that mood.
The Aussie was up a third of a percent at $0.7374 while the Canadian dollar retreated about half a cent from a three-month high of C$1.3372 per dollar. (Additional reporting by Shinichi Saoshiro; Editing by Louise Ireland)
