FOREX-Dollar near 7-week high as US data fans Sept-tapering expectations
* Strong non-manufacturing ISM, jobs data raise hopes on payrolls report
* A solid U.S. job report could cement case for a cut in Fed's stimulus
* Euro soft after Draghi cautious on euro zone recovery
* Euro/sterling near 4-month low after BoE's sanguine on rising rates
* Yen recovers from 6-week low on Japanese exporters buying
By Hideyuki Sano
TOKYO, Sept 6 (Reuters) - The dollar held firm near a seven-week high against a basket of currencies on Friday after solid U.S. economic data heightened expectations that a key jobs report later in the day might make a reduction in the Federal Reserve's stimulus a done deal.
In contrast, the euro was soft after the head of the European Central Bank gave a cautious assessment on budding signs of an economic recovery in the euro zone, saying the bank is ready to cut rates and inject liquidity.
"The dollar is strong on the back of rising expectations that rate hikes by the Federal Reserve could come sooner rather than later," said Shin Kadota, FX Strategist at Barclays.
"We expect the Fed to start tapering its stimulus unless today's payrolls report is exceptionally weak," he added.
The dollar index stood at 82.528 , having risen as high as 82.671 on Thursday, its highest level since late July, and extending its gain from its Aug 20 low of 80.754 to 2.4 percent.
Against the yen, the dollar hit a six-week high of 100.24 yen in early trade before cautious Japanese exporters took that opportunity to convert dollars to yen just in case the U.S. payrolls data may disappoint, sending the dollar down 0.4 percent on the day to 99.74 yen.
Traders also said one immediate risk for the dollar/yen is, apart from the U.S. job data, a possible fall in Japanese shares if Tokyo is not selected by the International Olympic Committee this weekend to host the 2020 Summer Games.
Traders say Japanese shares, to which the dollar/yen has had a strong correlation over the past several months, look set to fall if Tokyo's Olympic bid fails.
The euro traded at $1.3131, still near Thursday's seven-week low of $1.3110.
Spurring fresh interest in the dollar was a report from the U.S. Institute for Supply Management, which showed services industries in August posted their fastest growth since December 2005, well above expectations.
The employment component of the ISM services index also jumped to a six-month high while weekly initial jobless claims fell more than expected to a seasonally adjusted 323,000.
Separately, data from payrolls processor ADP showed U.S. private employers added 176,000 jobs in August, nearly matching expectations.
The confluence of upbeat data helped to fan expectations the long-awaited August government employment report due at 1230 GMT would also point to a steady recovery in U.S. employment, and firm up the case for the Federal Reserve to start winding back its bond buying this month.
The median forecast of economists polled by Reuters is for the non-farm payrolls to have risen 180,000, up from an increase of 162,000 in July, and for the jobless rate to have stood flat at 7.4 percent.
"Unless we see an increase of less than 100,000, the dollar's trend is unlikely to change," said a trader at a Japanese bank.
Also supporting the dollar, U.S. bond yields jumped, with the 10-year yield hitting the 3 percent mark and the two-year yield surging to a two-year high above 0.50 percent .
Concerns over U.S. plans to attack Syria are on the back burner for now, though traders noted the issue is likely to haunt markets next week when a vote on U.S. congressional resolution to authorise a military strike is expected.
Meanwhile, the euro wobbled near multi-month lows against the British pound, which held firm after the Bank of England showed no apparent unease over rising British interest rates.
The euro fetched 0.8417 pound, near a four-month low of 0.8408.
"I expect the euro to head lower considering anxiety ahead of an election in Germany and possible political crisis in Italy," said Takahiro Suzuki, vice president of forex at Nomura Securities.
German Chancellor Angela Merkel is seeking a third term in a parliamentary election on Sept. 22.
In Italy, concerns are growing that former prime minister Silvio Berlusconi may announce a decision to bring down Italian Prime Minister Enrico Letta's coalition government.