* US employers added 57,000 jobs in June, below economists'

110,000 forecast

* Fed funds futures priced a 53% chance of a September rate

hike, down from 67%

* Sources say Tokyo dropped explicit intervention warnings

to unsettle yen bears

(Updated in New York morning time)

By Karen Brettell and Harry Robertson

NEW YORK/LONDON, July 2 (Reuters) - The dollar fell sharply

on Thursday after the closely watched June employment report

showed U.S. employers added far fewer jobs than expected, while

the Japanese yen surged as traders braced for possible

intervention by Japanese authorities.

Employers added 57,000 jobs, below economists' expectations

for 110,000 job gains. Unemployment slipped to 4.2%, from 4.3%.

Markets quickly repriced their expectations for Federal

Reserve policy. Fed funds futures traders now see a 53% chance

of a rate hike by September, down from 67% before the report.

"It is weaker than expected, but the bulk of the numbers

were in leisure and hospitality. That's probably driven more by

seasonal factors than by anything else, so it's not very

nefarious," Sarah Ying, head of FX strategy at CIBC Capital

Markets, said.

The dollar index, which measures the greenback

against a basket of currencies including the yen and the euro,

was last down 0.66% at 100.73, with the euro up 0.63% at

$1.1448.

The dollar had been buoyed in recent months by rising

expectations that the Fed would raise rates as it continues to

battle inflation running well above its 2% annual target. Strong

capital inflows tied to the artificial intelligence boom have

also supported the currency.

"Unless we continue to see disappointments in the labor

market data, it still feels like the AI narrative is driving a

lot of the flow," Ying said.

YEN SURGES

The Japanese yen rallied sharply against the dollar on

Thursday as traders weighed a shift in intervention strategy by

Japan's Ministry of Finance and speculated whether Tokyo had

already moved.

Sources told Reuters Japanese officials were abandoning

their habit of telegraphing intervention risks, instead

signalling a more targeted campaign to squeeze speculators and

raise the cost of betting against the yen.

Officials were also avoiding any suggestion of a specific

"line in the sand" exchange-rate level that would trigger

action, in a more aggressive approach aimed at keeping traders

guessing.

"If they're not going to give guidance, the MOF can come in

at any time. So that is a scarier thought, I would think,

relative to the current status quo," Ying said.

"It's just a more aggressive way for the MOF to communicate

and to respond to yen weakness."

The Japanese yen strengthened 0.91% against the

greenback to 160.97 per dollar and reached 160.62, the strongest

since June 18.

What triggered the move remained unclear, and Japan's

Ministry of Finance declined to comment. Traders and strategists

offered differing explanations, with some speculating that

authorities had checked rates in the market - a move that

typically signals a willingness to intervene and can rattle

currency markets on its own.

"We will have to wait for data to ascertain if this was

intervention, but the timing of the move does suggest that it

was," Abbas Keshvani, Asia macro strategist at RBC Capital

Markets in Singapore, said.