The dollar edged up in volatile trading on Friday after data showed U.S. employment grew less than expected in August, but indicated a steady slowdown in the labor market, likely supporting gradual interest rate cuts by the Federal Reserve.

Nonfarm payrolls increased by 142,000 jobs last month after a downwardly revised 89,000 rise in July, the Labor Department's Bureau of Labor Statistics said on Friday. Economists polled by Reuters had forecast payrolls increasing by 160,000 jobs after a previously reported 114,000 gain in July.

The dollar, which initially fell against most major peers after the release of the jobs data, soon recovered ground to trade higher.

The euro was 0.3% lower against the dollar at $1.1078, jumping as high as $1.1155 right after the release of the payrolls report. The Dollar Index, which measures the U.S. currency's strength against six major peers, was up 0.3% at 101.32.

"I think the market's really struggling with this one because it's really in the middle of what could be used as a justification for either a 25 or 50 basis point rate cut," Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, said.

Traders now see a 39% chance that the Fed will cut its policy rate, now in the 5.25% to 5.50% range, to a 4.75% to 5% range at its upcoming meeting on Sept 17-18, according to LSEG data. Before the report they had seen about a 43% chance of that outcome, favoring instead a quarter-point reduction.

"The U.S. economy looks more likely to gouge the runway in the months ahead, justifying an increasingly aggressive response from officials at the Federal Reserve," said Karl Schamotta, chief market strategist at payments company Corpay in Toronto.

"A half-point rate cut at the central bank’s September meeting remains unlikely, but today’s release provided clear evidence of a sharp deterioration in labor market fundamentals, and will bolster bets on at least one jumbo-sized rate cut in the coming months," he said.

Against the Japanese yen, the dollar rose 0.2% to 143.75 yen, on pace to snap a three-session streak of daily losses.

Safe haven demand and expectations for imminent rate hikes from the Bank of Japan have helped support the Japanese currency in recent sessions.

Traders have sold the dollar against other currencies fairly consistently over the last couple of months, as concern has risen that a slowing U.S. economy will require chunky rate cuts.

Federal Reserve Bank of New York President John Williams said Friday that a better balanced economy has opened the door to cutting rates, with the full course of action to be determined by how the economy performs.

Fed Chair Jerome Powell signaled that the central bank's focus was shifting from fighting inflation to preventing deterioration in the job market when he strongly endorsed an imminent start to the monetary easing cycle at the annual economic conference in Jackson Hole last month.

The pound was about flat on the day at $1.31825.

The Bank of England meets in two weeks to set monetary policy. Right now, the derivatives market shows traders see very little chance of a rate cut this month, but a quarter-point cut is fully priced in for November.

In cryptocurrencies, bitcoin rose about 1% to $56,720.

(Reporting by Saqib Iqbal Ahmed; Additional reporting by Karen Brettell and Kevin Buckland; editing by Shri Navaratnam, Kim Coghill, Andrew Heavens, Mark Heinrich and Jonathan Oatis)