* Pace of U.S. hiring cools in December, jobless rate steady
* Fed minutes show some policymakers concerned about bond buying
* Dollar hits highest level since July 2010 vs yen on BOJ speculation
By Wanfeng Zhou
NEW YORK, Jan 4 The dollar rose to a near 2-1/2 year high against the yen on Friday after Federal Reserve meeting minutes the previous day showed a growing concern about further stimulus for the economy and on speculation of more monetary easing in Japan.
But the U.S. currency erased its gains versus the euro after a key U.S. jobs report showed U.S. hiring eased slightly in December, denting expectations the Fed will tighten monetary policy sooner rather than later.
U.S. nonfarm payrolls grew by 155,000 last month, in line with analysts' expectations and falling short of the levels needed to bring down the country's lofty unemployment rate, which remained at 7.8 percent.
The data came a day after minutes from the Fed's December meeting showed some policymakers were contemplating an end to their bond-buying program, also known as quantitative easing, as early as this year, which sparked a rally in U.S. bond yields and the dollar.
"Today's employment report suggests that we are not seeing an accelerating rate of improvement in the labor market. As long as the current trend persists, we believe QE 3 will continue," said Vassili Serebriakov, FX Strategist at BNP Paribas in New York.
"The reason that the dollar is holding up better against the yen than anywhere else is because the main focus is on the Japanese monetary policy rather than the U.S. monetary policy."
The dollar rose as high as 88.40 yen, according to Reuters data, the highest since July 2010. It briefly pared gains after the jobs data before rallying again to last trade at 88.17 yen, up 1.1 percent. Traders cited more option barriers at 88.50 and 89 yen.
The yen has struggled in recent weeks on expectations Japan's new government led by Prime Minister Shinzo Abe will push to weaken Japan's currency and force the Bank of Japan to implement aggressive monetary stimulus to beat deflation.
Analysts said the dollar's break above the 88-yen level is significant, with some expecting yen weakness to continue.
"The move lower in the dollar/yen may have served as a profit taking exercise for U.S. dollar longs who can now pile back in to more positions that eventually drive it closer to 90.00," said Neal Gilbert, market strategist at GFT in Grand Rapids, Michigan.
The euro was last little changed at $1.3045, rebounding from a three-week low of $1.2997, according to Reuters data.
Against the yen, the euro rallied 1 percent to 115.02 .
The Fed said in December that it would keep interest rates near zero until the unemployment rate falls to 6.5 percent for as long as estimates of medium-run inflation do not exceed 2.5 percent.
"The most important point is that the latest unemployment rate data has been broadly steady for four months now, so even with decent employment growth no downward progress has been made on the unemployment rate," said Alan Ruskin, head of G10 FX strategy at Deutsche Bank in New York.
The data "will if anything push out the date for an end to QE, represents solidly risk-positive numbers and will lead to some minor squeeze on recent U.S. dollar longs."
The dollar typically weakens when investors increase risk exposure by buying higher-yielding and growth-linked currencies such as the euro and Australian dollar, and gains when investors are risk-averse and seeking safe havens.
Some analysts expect the safe-haven dollar will strengthen in the coming weeks as investors increasingly focus on more political wrangling in Washington on budget issues, including further spending cuts and the federal debt ceiling.
But analysts cautioned that the uncertainty on the U.S. fiscal front will hurt business investment and economic growth. That means the Fed will have to keep its monetary stimulus for longer, which will hurt the dollar.
Separate data showed the vast U.S. services sector in December grew at its fastest clip in 10 months.