* Dlr index pulls back from 2-wk low as Cohn exit shockpeters out
* Dollar/yen retraces losses as broader risk appetiterecovers
* Euro awaits ECB policy decision for cues
* ECB seen standing pat, stance amid US political confusioneyed (Adds details and quotes, updates prices)
By Shinichi Saoshiro
TOKYO, March 8 (Reuters) - The dollar recovered ground onThursday, drawing relief from positive labour market data andthe White House saying Canada and Mexico, and possibly othercountries, may be exempted from planned U.S. import tariffs onsteel and aluminium.
Elsewhere on the currency markets, the euro trod water aheadof a European Central Bank meeting, later in the day, that isexpected to leave policy rates unchanged for now, but mayprovide clues to the future.
The dollar had weakened sharply following the resignation onTuesday of Gary Cohn, the top economic advisor to the WhiteHouse who was seen as seen as a bulwark against protectionism inPresident Donald Trump's administration.
His departure had fanned fears of a potential global tradewar if Trump pressed ahead with proposals for tariffs on allimports of steel and aluminium.
Broader financial markets grew calmer, with Wall Streetparing losses overnight, after the White House raised thepossibility of exemptions. Some dealers have bet on thepossibility that the tariff threat was a negotiating ploy intrade talks with neighbours.
Trump plans to offer Canada and Mexico a 30-day exemptionfrom planned tariffs on steel and aluminum imports, which couldbe extended based on progress in talks on amending the NorthAmerican Free Trade Agreement (NAFTA), a White House officialsaid on Wednesday night. dollar's recovery was stoked by Wednesday's data on U.S.private hiring and labour costs that reinforced the view ofunderlying strength in the economy.
The U.S. currency was steady at 106.040 yen JPY= afterslipping to as low as 105.450 the previous day in reaction toCohn's departure.
The dollar index against a basket of six major currencieswas effectively flat at 89.585 .DXY after pulling away from atwo-week trough of 89.407 the previous day.
"The market has managed to digest Cohn's resignation," saidJunichi Ishikawa, senior FX strategist at IG Securities inTokyo. "That said, 'Trump risk,' which are developmentsassociated with the U.S. president and his circle, will continueto impact the market as one of the main themes of 2018."
While worries about U.S. tariffs may have eased somewhat,the dollar's recovery was limited as fears of trade conflictslingered with Trump seen sticking to a protectionist stance inthe longer run.
Daisuke Karakama, chief market economist at Mizuho Bank inTokyo, said that while the currency market is difficult topredict, the dollar "will almost certainly weaken" if that'swhat the United States wants to happen.
"Along with tariffs, weakening your own currency becomes aweapon in a trade war," he said.
The euro was little changed at $1.2408 EUR= afterretracing a bounce earlier on Wednesday to a 2-1/2-week peak of$1.2447.
Focus for the common currency was on the ECB's policydecision at 1245 GMT. The central bank is all but certain tokeep policy unchanged but may tweak its communication stance tooffer at least a few clues about its progress towards ending itsunprecedented bond purchases later this year. normal circumstances the ECB decision would not be arisk event as the central bank is expected to stand pat onpolicy. But the ECB's stance will be watched carefully in thewake of political confusion in the United States," Ishikawa atIG Securities said.
The Canadian dollar was 0.2 percent firmer at C$1.2881 CAD=D4 per dollar, having weakened to C$1.3002 on Wednesdaybut recovering on the prospect that Trump's tariffs may exemptCanada and Mexico.
The Mexican currency was at 18.68 pesos per dollar MXN=D2 following its recovery from 18.90 touched on Wednesday.
The Australian and New Zealand dollars were 0.1 percenthigher at $0.7833 AUD=D4 and $0.7292 NZD=D4 , respectively. (Editing by Simon Cameron-Moore and Richard Borsuk)