* 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 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.