* U.S. data reflects economic recovery gathering pace
* Euro hits two-week low vs dollar after strong 2013
* Global manufacturing ended 2013 on strong note
* Euro falls after asset quality snapshot
By Julie Haviv
NEW YORK, Jan 2 (Reuters) - The dollar rose against the euro on Thursday as an array of improving U.S. economic reports supported expectations that the Federal Reserve will gradually scale back its bond purchases.
The euro was the strongest-performing major currency in 2013, but historically has tended to weaken at the start of a calendar year. The single currency dropped to a two-week low of $1.3628 before paring losses to last trade 0.6 percent lower at $1.3664.
The U.S. dollar hit a high of 105.44 yen, its strongest level versus the Japanese currency since October 2008, before erasing gains to trade down 0.3 percent at 104.94 yen.
Japanese financial markets are closed Thursday and Friday for the New Year’s break.
The dollar should continue to benefit from an improving U.S. economy.
A gauge of U.S. factory activity held near a 2-1/2-year high in December and the number of Americans filing new claims for jobless benefits fell for a second week last week, pointing to resilience in the economy.
Other data on Thursday showed construction spending hit its highest in nearly five years in November.
“The U.S. dollar has started the year with strength, and a shift in market dynamics suggests the dollar may continue to gain versus the euro and other counterparts,” said David Rodriguez, quantitative strategist at DailyFX in New York.
“Forex volatility prices and rising U.S. Treasury yields keep us focused on dollar gains,” he said.
Against a backdrop of a firming jobs market and brightening economic outlook, the Fed said in December it would reduce its monthly $85 billion bond buying program by $10 billion starting in January.
Global manufacturing ended 2013 on a strong note, as major exporters like the United States, Japan and Germany all saw demand pick up, although China’s performance remained modest, surveys showed on Thursday.
U.S. manufacturing activity grew in December at its swiftest pace in 11 months and the rate of job growth was the strongest since March, according to Markit’s Purchasing Managers’ Index.
Other U.S. economic figures, including construction spending and the Institute for Supply Management’s purchasing managers’ survey, also pointed to steady gains in the world’s largest economy.
A Reuters poll of economists taken in mid-December forecast annualized first-quarter economic growth of 2.5 percent, reaching 3 percent by year-end. Since then, economic data has tended to exceed forecasts.
Volumes were low in late December and prices driven by factors such as euro zone banks repatriating funds to shore up their capital bases before the European Central Bank’s year-end review of their assets, which supported the euro.
“Last week the market was mainly determined by position rescaling,” said Ulrich Leuchtmann, head of currency research at Commerzbank in Frankfurt.
“Today is the first day when fundamentals work out again ... That’s why there is pressure on euro/dollar.”
While few analysts expect the ECB, which holds a policy meeting next week, to change interest rates in the near future, the Fed is closely monitoring the strength of the U.S. recovery to gauge the pace at which it scales back its bond-buying.
“The sensitivity to surprises in data in the euro zone is much lower than the sensitivity to surprises in the data in the U.S.” Leuchtmann said.
But it offered little sustained support for the single currency, which was down 1 percent against the yen at 143.38 yen, according to Reuters data.