The U.S. dollar fell sharply immediately following the release of payroll data from the Labor Department which showed that fewer-than-expected jobs were added to the economy last month.

The dollar index, a measure of the greenback's strength against a basket of six global currencies, gave back earlier gains to trade 0.45% lower at 96.77 after the Bureau of Labor Statistics said 138,000 new jobs were created in May, well below the market consensus of 185,000. Headline unemployment fell to 4.3% from 4.4% the BLS said, but the Labor Force Participation rate, a measure of the broader American workforce, slipped to 62.7% from 62.9%. The BLS also revised the April job creation total to 174,000 from its initial estimate of 211,000.

"The US May Jobs report was an ugly one ... virtually across the board," said John Hardy, head of FX strategy at Saxo Bank. "For confirmation that the US dollar may weaken further on this, we are watching US yields as the low for the cycle in the 10-year comes into view around 2.16%."

"A drop below here could see USDJPY in particular challenging lower, especially if this is accompanied by a bit of risk off in equity markets," Hardy added.

Benchmark 10-year U.S. Treasury bond yields, which move in the opposite direction of prices, fell 5 basis points to 2.16%, the lowest level since early November, as investors trimmed bets on faster rate hikes from the U.S. Federal Reserve.

The consensus for a strong May reading was hardened by data from ADP, a payroll processing company, which indicated in its National Employment Report yesterday that 253,000 new jobs were created last month, well ahead of the market's 185,000 forecast, thanks to a 174,000 surge in private-sector hiring.