March 11, 2013 / 4:41 PM / 4 years ago

FOREX-Dollar strengthened by speculation Fed could change course

* Dollar near 3-1/2-year high vs yen

* U.S. job gains stoke speculation Fed may quit QE

* Yen seen weakening on prospect of aggressive BoJ easing

By Wanfeng Zhou

NEW YORK, March 11 (Reuters) - The dollar held near a 3-1/2-year high against the yen and was little changed against the euro on Monday after last week's stronger-than-expected U.S. jobs growth fueled speculation the Federal Reserve could back off its ultra-loose monetary policy sooner than anticipated.

The possibility that the Fed could rein in stimulus measures after the government on Friday reported surprisingly strong job gains in February and a fall in the jobless rate to a four-year low is likely to keep the dollar buoyant for now.

The dollar was little changed on the day against a basket major currencies at 82.696, not far from the seven-month high of 82.924 hit on Friday. Having risen 4.8 percent since a low hit in early February, the index is seen on course to test its July 2012 peak of 84.10.

"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.

Some strategists, however, said market reaction to the jobs data might have been overdone and the dollar could see some consolidation around these levels.

"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 Fed, at its last policy meeting in late January, had left in place its $85 billion bond-buying stimulus program and had repeated a pledge to keep purchasing securities until the outlook for employment "improves substantially."

The dollar on Monday was up 0.1 percent against the yen, to 96.13 yen, not far from Friday's high of 96.60 yen, which was its highest level since Aug. 12, 2009.

Against the dollar, the euro was little changed at $1.3010 , 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.

Strategists said 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.

The Bank of Japan is perceived to be seeking a "new dimension" of easing under a 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.

"For the ECB, markets are speculating more aggressive easing, which is in contrast with expectation to what is happening in the Fed, and that is inherently negative for euro/dollar," Marinov said.

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.

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