FOREX-Dollar hovers near recent highs on Fed policy shift bets
* Dollar near 3-1/2-year high vs yen
* U.S. job gains stoke speculation Fed may quit QE
* China data keeps investors cautious
* Yen seen weakening on prospect of aggressive BoJ easing
By Julie Haviv
NEW YORK, March 11 (Reuters) - The dollar hovered close to a recent 3-1/2-year high against the yen on Monday after last week's strong U.S. jobs data fanned speculation the Federal Reserve could back away from its ultra-loose monetary policy sooner than expected.
But the greenback edged lower against the euro as investors booked profits after it hit a three-month high on Friday off the U.S. government report showing surprisingly strong job gains in February and a four-year low in the unemployment rate.
With the state of the U.S. labor market key to the path of Fed policy, the report fueled speculation that the Fed could rein in its stimulus measures.
Some strategists, however, said the market reaction to the jobs data might have been overdone, with some contending the report will not be enough to trigger the Fed's reconsideration of its third round of quantitative easing, or QE3.
"Instead, the February report will likely be perceived by the Federal Reserve as another step in the right direction, but not great enough to warrant a reconsideration of the current pace of QE3," said Christopher Vecchio, currency analyst at DailyFX in New York.
"For now, the Fed will continue its $85 billion a month in asset purchases as planned," he said.
The dollar index, which tracks the greenback against a basket of major currencies, was last at 82.618, below a seven-month high of 82.924 hit on Friday.
"Upcoming economic data or commentary from Fed officials that reinforce the notion of an earlier-than-expected exit from quantitative easing should continue to be broadly supportive of the U.S. dollar," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
The Fed, at its last policy meeting in late January, had left in place its $85 billion bond-buying stimulus program and repeated a pledge to keep purchasing securities until the outlook for employment "improves substantially."
Against the yen, the dollar was last trading up 0.3 percent at 96.26 yen, not far from Friday's peak of 96.54 yen, which was its highest level since Aug. 12, 2009.
The euro was up 0.2 percent against the dollar, at $1.3032 , having hit a three-month low of $1.2955 on Friday. Traders said buyers could emerge on dips around $1.2950, which could act as near-term support.
Data released on Friday showed speculators boosted their bets in favor of the U.S. dollar in the latest week to the highest in more than seven months.
Economic data out of China, the world's second-largest economy, kept investors cautious but failed to rattle demand for riskier assets, with U.S. stock indices trading higher.
China reported over the weekend that annual industrial production for January and February combined rose 9.9 percent - the lowest level since October 2012 - while its consumer price index jumped more than expected last month.
CENTRAL BANK POLICIES EYED
Strategists said that while the Fed's next policy step could be to scale back its stimulus, the world's other major central banks could ease policy further.
"It is hard to glean anything too conclusive from the numbers, and Friday's (dollar) move looks like a slight over- reaction," analysts at Lloyds said in a note.
"So while we would not be aggressive dollar sellers, we would look for a correction to dollar strength from here, and 83 on the dollar index is likely to prove difficult to break."
The Bank of Japan is perceived to be seeking a "new dimension" of easing under its new governor, Haruhiko Kuroda, who is expected to be appointed this month.
Many in the market expect the BoJ to ease aggressively at Kuroda's first policy meeting on April 3-4, as he promised to move quickly to implement fresh monetary stimulus on Monday, which could lead to further yen weakness.
While the European Central Bank is a bit more cautious about further easing, the head of the International Monetary Fund, Christine Lagarde, said on Friday the ECB should lower rates.
Analysts said the euro was also likely to trend lower against the dollar because of growing worries about peripheral countries of the euro zone and political concerns about Italy.
Ratings agency Fitch added to Italy's mounting problems on Friday by cutting its credit rating due to the political uncertainty, deep recession and rising debt.