* U.S. nonfarm payrolls rise in July, initially help dollar
* Jobs report bolsters Sept Fed rate-hike prospects
* Pressure on dollar longs rise ahead of weekend (Recasts, updates prices, adds comment)
By Gertrude Chavez-Dreyfuss
NEW YORK, Aug 7 (Reuters) - The dollar dropped from a near four-month high against a currency basket on Friday, as investors pared back bullish bets on the greenback following a solid U.S. jobs report.
The dollar also had earlier risen to a two-month peak versus the yen and a near five-month high against the Swiss franc. By midday trading, however, the U.S. currency gave up those gains as well, in line with the drop in long bond yields,
The outlook though for a September rate increase by the Federal Reserve remained intact. Analysts said reversals in the dollar's price action occur often on days where a highly-anticipated U.S. economic data such as the non-farm payrolls report is released before a weekend.
"This is very typical. Everybody got caught being long dollars and in front of a weekend, the dollar longs are being pressured by very aggressive shorts," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
"This morning was a classic short squeeze on the euro and an unwind of dollar/yen," he added.
On Friday, data showed U.S. nonfarm payrolls increased 215,000 last month, lower than market expectations for a rise of 223,000 jobs. But upward revisions to the previous months and a gain in average hourly earnings were viewed positively by market participants.
Following the jobs report, the swaps market was pricing in a 52 percent chance of a September rate hike, up from 47 percent before the data's release.
"If there is a takeaway from today's data, it may be that, yes, the Fed is looking more and more likely to raise rates in September," said Christopher Vecchio, currency analyst at DailiyFX in New York.
"However, given low headline inflation readings and a lack of break-neck speed in the labor market, the first hike in September (or October or December for that matter) is likely to be an isolated event."
In midday trading, the dollar index was down 0.3 percent at 97.574 .DXY . It earlier rose as high 98.334, the highest since April 23.
The dollar touched two-month peaks against the yen above 125 yen, but was last down 0.4 percent on the day at 124.21 yen JPY= .
The euro, meanwhile, was up 0.4 percent against the dollar at $1.0763 EUR= .
Against the Swiss franc, the dollar last traded flat at 0.9811 franc CHF= . It earlier rose to its highest level since March 20.