* Dollar index hovers near two-month highs after more upbeat U.S. data
* Chinese industrial output, retail sales and GDP next in focus
* U.S. markets closed on Monday for Martin Luther King, Jr. day
By Ian Chua
SYDNEY, Jan 20 The U.S. dollar started Monday near a two-month high, having enjoyed a solid comeback last week after a string of mostly upbeat data convinced markets the Federal Reserve will continue its gradual withdrawal of stimulus.
The dollar index stood at 81.215, after rising 0.7 percent last week to as high as 81.295. Data on Friday showed U.S. industrial output rose at its fastest clip in 3-1/2 years in the fourth quarter, adding to other encouraging reports such as retail sales.
Richmond Fed President Jeffrey Lacker on Friday said signs of an improving labour market justified further reductions in the Fed's monthly bond purchases.
The euro traded at $1.3530, not far from a two-month trough of $1.3517 plumbed on Friday. Against the yen, both the dollar and the common currency were a touch softer at 104.27 and 141.06 respectively.
Traders expect little market action in the lead up to a batch of Chinese data due around 0200 GMT, while overall volume could be dampened by a holiday in the United States.
China will release industrial output, retail sales and fourth-quarter gross domestic product (GDP).
Analysts at Barclays Capital see a further moderation in China's industrial production growth and GDP as elevated interest rates across the money, bond and credit markets could lead to higher funding costs and weigh on economic growth.
"Investors in resource risk currencies such as the AUD, BRL and ZAR will be watching the news out of China very closely, as it will set the tone not just for now but for the rest of the trading year," said Evan Lucas, strategist at IG in Melbourne.
"The market is looking to poke holes in anything that shows signs of sustainability from China."
The Aussie, already hit by weak jobs data at home last week, looked vulnerable at $0.8771 within a hair's breadth of a 3-1/2 year trough of $0.8764 plumbed Friday.
Traders said the 87 U.S. cent area should provide good support, like it did back in 2010, although a break could see it test $0.8600 in a hurry.
In contrast, sterling held onto most of Friday's gains after British retailers reported their fastest sales growth in more than nine years.
The pound traded at $1.6411, having risen more than 0.4 percent to a high of $1.6459. Early this year, it hit a three-year high of $1.6605.