By Vicki Schmelzer

NEW YORK, March 5 (MNI) - The prospect of non-farm payroll gains in March was enough to increase risk appetite Friday.

Stock and commodity prices rose and the dollar lost ground against the euro and other currencies, except the yen, on the belief of more sustained U.S. recovery.

U.S. February non-farm payrolls fell by 36,000 in February, versus MNI's median estimate of a 50,000 decline. January and December saw upward revisions of 35,000, largely offsetting February losses.

The unemployment rate was unchanged at 9.7%, versus MNI's median looking for a small uptick to 9.8%.

Analysts maintained that without the snow effects and stripping away the census workers, February payrolls would likely have been positive.

Consensus forecasts suggested that March payrolls will probably show job gains instead of losses, potentially sizable gains (170,000 to 200,000 are some high estimates), even with the addition of census workers.

The realization that the worst of U.S. unemployment has likely been seen prompted risk aversion trades to be exited and new risk friendly trades to be entered.

In many ways, the market playbook was similar to that seen pre-crisis, when risk appetite served to lift stocks and commodities and carry trades were put on.

Dollar-yen and yen crosses rose sharply Friday, but stalled well ahead of last month's peaks at Y92.14 (Feb. 19) and Y126.97 (Feb. 3).

The Japanese yen has come under pressure in the past two days -- for two reasons, traders said.

Thursday, the yen crumbled on reports of a Japanese government provision in the 2010/2011 budget that would allow a Y5 trillion increase in the borrowing limit for FX intervention.

This was taken to mean that the Bank of Japan was considering intervention.

Analysts downplayed the prospects of intervention while dollar-yen is above Y85, but market players continued to sell yen.

Then Friday. the yen slipped further on talk that the BOJ may consider further monetary easing at the March 16-17 meeting.

There are reasons to think that the central bank may indeed expand its tool kit, analysts said.

"The BOJ seems to be under some pressure from the MOF to do more ... to combat deflation and lower yen borrowing costs," said Marc Chandler, senior currency strategist at Brown Brothers Harriman.

"The BOJ's response appears to be that the government needs to reduce its deficit spending," he noted.

Dollar-yen was trading at Y90.35 Friday, up from overnight lows near Y88.99 and down from highs near Y90.58, tested in U.S. action.

If dollar-yen can break above resistance at Y90.60, "there is scope for a move to Y91.60," BBH's Chandler said.

"Japanese institutional investors, who typically repatriate funds ahead of the fiscal year-end (March 31) might see this recent price action as a gift and sell dollars into it," he said.

In other currencies Friday, the euro stood at $1.3617, on the high side of a $1.3529 to $1.3629 range.

On two occasions this week, the euro broke above $1.3700 but failed to rally further, keeping the market's long-held bearish bias in place.

The euro, like other currencies such as the Aussie or Canadian dollar, remains soft in comparison to the 2010 highs posted in January ($1.4582 euro, $0.9330 Aussie, C$1.0222), although the Aussie and loonie, at current levels near $0.9068 and C$1.0300, are far closer to their January peaks.

Until these January highs, seen as larger resistance, are taken out, market players will remain bullish towards the dollar and bearish toward other currencies.

However, a handful of analysts view recent events as signalling a potential end to the dollar's latest reign as FX king.

While "the issues which drove dollar strength in Q1 -- global slowdown, sovereign risk, China tightening -- have not been solved," progress on these issues, especially Greece, has been "substantial," observed John Normand, global head of currency strategy at JP Morgan Securities.

In addition, "the technical backdrop has turned dramatically (CFTC data shows extended long dollar positions) such that the dollar is unlikely to make new highs, trade-weighted or pairwise this Spring," he said.

JP Morgan has closed their dollar long positions and has begun to focus instead on cross-rates, preferring a long Canadian dollar position "within the commodity block and a short sterling within Europe," Normand said.

In other markets Friday, the S&P 500 closed up 1.40% at 1138.69 after trading in a 1122.93 to 1139.67 range.

The Reuters-Jefferies CRB index closed up 0.78% at 276.93, after trading in a 274.80 to 275.44 range.

The S&P 500 has seen a range of 1044.89 (February 5) to 1150.50 (January 19) this year, while the CRB has seen a range of 256.89 (February 5) to 293.75 (Jan. 6-7).

Next week, the market awaits a slew of U.S. and Chinese data that is expected to set the trading tone.

In the U.S., weekly jobless claims, February retail sales and March preliminary University of Michigan consumer sentiment will be eyed.

In China, the host of Chinese data will be "an important update on momentum in the Chinese economy," said Robert Rennie, senior currency strategist at Westpac.

Chinese data releases include: new loans, trade, exports/imports, CPI, PPI, retail sales and fixed asset investment.

Chinese port activity hints at stronger activity, Rennie said.

He noted that "when key Chinese ports are jammed with bulk carriers, industrial value add tends to rise," adding that conversely, "when port activity drops off, factories tend to slow down."

Port activity in January at major Chinese ports was up 31% vs year ago levels, Rennie said.

"Using smoothed shipping volume expected in the next 14 days as a proxy for likely port activity in February and March, we would guess-timate that actual activity numbers will rise to +37% in February and +46% in March."

Such readings, if realized, would suggest further strength in "industrial add" in coming months, Rennie said.

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