* Dollar hits two-week low vs yen
* Euro hits over 3-1/2-month high vs dollar
* Traders grow skeptical of 2016 Fed rate hikes
* U.S. Jan. non-farm payrolls report eyed (Updates to open of U.S. trading, changes byline, dateline; previous LONDON)
By Sam Forgione
NEW YORK, Feb 4 (Reuters) - The U.S. dollar extended its plunge against major currencies on Thursday as traders sharply unwound bullish bets against the greenback on continued skepticism that the Federal Reserve would be able to hike interest rates this year.
The euro hit its highest level in over 3-1/2 months against the dollar of $1.12390, while the dollar hit a two-week low against the yen of 116.730 yen.
The dollar index, which measures the greenback against a basket of six major currencies, also hit its lowest level in more than 3-1/2 months, of 96.259 .DXY . The dollar hit a 3-1/2-week low against the Swiss franc of 0.99335 franc CHF=EBS .
"This is a general rebasing or re-scaling of market expectations around specifically the dollar," said Shahab Jalinoos, global head of FX strategy at Credit Suisse (VX:CSGN) in New York.
Analysts said dovish comments from Fed president William Dudley to MNI on Wednesday and recent weak U.S. economic data continued to hurt the dollar. The dollar index posted its biggest one-day decline in two months on Wednesday.
Speculators had cut bullish bets on the U.S. dollar in recent weeks on reduced Fed rate hike expectations. The value of the dollar's net long position was at $23.85 billion in the week ended Tuesday, Jan. 26, marking the fifth straight weekly decline according to Reuters calculations and data from the Commodity Futures Trading Commission.
Fed fund futures contracts on Thursday suggested traders were pricing in just an 8 percent probability of a Fed rate hike next month, and just a 34 percent chance by the end of the year.
U.S. economic data, including data showing new orders for U.S. factory goods fell in December by the most in a year, also reinforced notions that the Fed would need to delay further rate hikes.
Investors awaited Friday's January U.S. non-farm payrolls report.
"For those people who are skeptical of any additional Fed tightening this year, a soft labor market report would reinforce (that view)," said Kathy Lien, managing director at BK Asset Management in New York.
The euro EUR=EBS was last up 0.63 percent against the dollar at $1.11740.