LONDON (Reuters) - The dollar hit a 3-1/2-year high against the yen and rose against its currency basket on Friday, buoyed by hopes that the U.S. labor market is on the mend and the Federal Reserve may tone down its ultra-loose monetary policy.
Those expectations also drove the dollar up against the euro.
The common currency rose on Thursday after European Central Bank President Mario Draghi gave less dovish policy signals than some in the market expected.
But while it extended gains against the yen on Friday, it lost ground to the dollar, with the still generally grim outlook for the euro zone economy supporting expectations the ECB may eventually lower rates.
The yen seems likely to stay under pressure as investors look past the Bank of Japan's steady policy decision on Thursday to its April meeting, where new officials are expected to take aggressive action to beat deflation.
The dollar rose 0.7 percent to 95.51 yen, its strongest level since August 2009. It has gained 10 percent against the yen so far this year.
The euro was up 0.6 percent at 125.02 yen, trading at its highest level in nearly two weeks.
The dollar's rise reflected the market's focus on the U.S. jobs data due at 1330 GMT. Economists polled by Reuters expect the economy to have added 160,000 jobs in February. The unemployment rate is forecast to stay at 7.9 percent.
Indicators like the private sector ADP report and weekly claims figures suggest the economy may have been adding jobs at a robust pace.
A drop in the jobless rate is key to how long the Fed's ultra-loose monetary policy setting will be in place, and an improvement in the labor market could give those at the central bank campaigning for a less aggressive policy a shot in the arm.
That would push U.S. yields higher and give the dollar a boost. The dollar index <.DXY> was up 0.2 percent at 82.228, within sight of a 6-1/2 month high of 82.604 struck on Wednesday.
"Psychologically, the market is braced for a better number and if it comes in at 170-175,000 then we will see the dollar rise further," said Geoffrey Yu, currency strategist at UBS. "A close-to-consensus number is unlikely to have much of an impact, while a bad number could hurt risk appetite."
Yu said any pullback in the dollar especially against the yen could be a good buying opportunity.
Investors expect the Bank of Japan to launch more monetary stimulus at its next meeting on April 3-4, when Haruhiko Kuroda, a vocal advocate of aggressive easing, is expected to have taken over as governor. The BOJ is scheduled to hold two policy meetings in April, with the second to be convened on April 26.
If the BOJ expands its stimulus program next month that could lead to the dollar trading in the 95-98 yen area or even open the way for a test of 100 yen, said Ronald Ip, Director of Wealth Solutions Group for HSBC Global Markets.
EURO SLIPS VS DOLLAR
The euro eased against the dollar, having climbed about 1 percent a day earlier as those betting against the currency covered short positions after the ECB president gave no indication he would cut interest rates further in the euro zone.
Draghi on Thursday played down the threat of contagion to other euro members stemming from a political stalemate in Italy. He also sounded more upbeat on the outlook, saying there are many signs that market confidence in the euro area is returning.
The single currency slipped 0.1 percent to $1.3092.
However, "the downward revision of (euro zone) growth forecasts and the still-below-target inflation forecast continue to provide the flexibility for action in the future," Morgan Stanley analysts said in a morning note.
They said any rebound in the euro against the dollar was an opportunity to sell for an eventual decline to $1.27/1.28 area.
(Additional reporting by Masayuki Kitano in Singapore; Editing by John Stonestreet)
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