* Dollar index rises to highest in seven weeks after upbeat ADP data
* Fed minutes cautious on QE3 taper, but U.S. yields rise
* Euro under pressure ahead of ECB policy meeting later Thurs
* China inflation shows sharper-than-expected slowing
By Lisa Twaronite and Ian Chua
Tokyo/SYDNEY, Jan 9 The dollar hovered close to seven-week highs against a basket of major currencies in Asia on Thursday, after an upbeat U.S. private-sector jobs report drove U.S. short-term yields and market rates higher and raised expectations for key payrolls data later this week.
The dollar index was slightly higher on the day at 81.037. It rose as far as 81.166 on Wednesday, a high not seen since late November, after the weekly ADP report showed private employers added a bigger-than-expected 238,000 jobs in December, the strongest increase in 13 months.
The ADP data lifted hopes that non-farm payrolls on Friday will surprise on the upside and pushed 2-year Treasury yields to a four-month high of 43 basis points.
"The ADP numbers were quite strong, and if the payrolls report surprises on the upside, too, that would help push up the dollar," said Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank.
Minutes from the Federal Reserve's Dec. 17-18 meeting showed the central bank wanted to err on the side of caution even as it began to scale back its massive bond-buying stimulus.
But market participants have already begun to price in tighter policy sooner rather than later, when the tapering is finished. Many expect the central bank to make its final asset purchases at the end of this year, Sera said.
Fed fund futures sold off with big losses seen in the late-2015 through to 2018 contracts, such that a first hike in rates is now fully priced for July 2015. Just last month it was not priced in until early 2016.
"Our economist thinks the FOMC is on track to continue tapering in measured steps, on course for ending asset purchases by the end of this year. Against this backdrop, we remain constructive on the U.S. dollar," analysts at BNP Paribas wrote in a note to clients.
The dollar rose to a one-week high of 105.135 yen on Wednesday and was last steady on the day at 104.87 yen. It hit a five-year high of 105.45 yen earlier last week.
The dollar is likely to gain against its Japanese counterpart this year on widening yield differentials between the two countries as the Fed tapers and the Bank of Japan, by contrast, keeps its ultra-easy policy stance aimed at stoking inflation.
BOJ board member Sayuri Shirai said it might even be desirable to take more than two years to achieve the central bank's inflation target if the burden on households and the corporate sector proves to be excessive, according to the text of a speech released on Thursday.
Shirai also said there is a lot of uncertainty about the time frame for the BOJ's 2 percent inflation target and that the central bank has yet to anchor inflation expectations around 2 percent, according to the text of the speech.
The euro edged up slightly to $1.3588 after sliding to a one-month low of $1.3552 on Wednesday.
The common currency is likely to stay under pressure in the lead up to the European Central Bank policy meeting later on Thursday and could fall further if the ECB highlighted the risk of disinflation, traders said.
The euro also edged up against the yen to 142.50 but remained well below last week's five-year high of 105.45 yen.
The Australian dollar lost ground against the broadly firmer greenback, dipping back below 89 U.S. cents as it continued to relinquish last week's gains despite data showing the country's retail sales and house building surpassed expectations in November.
It was last down 0.3 percent at $0.8878 after earlier brushing a one-week low of $0.8863.
But the Aussie was underpinned by Chinese inflation data, which suggested less chance for tighter monetary policy in its biggest trading partner.
China's annual consumer inflation slowed more sharply than expected to a seven-month low of 2.5 percent in December. That eased market fears of policy tightening, although the central bank is tapping the brakes on bank liquidity.