* Dollar supported by expectations of Fed’s eventual exit from QE
* Euro off low after euro zone PMI shows broad improvement
* Yen broadly softer after improved global risk sentiment
* Aussie falls after RBA says it is still high
By Hideyuki Sano
TOKYO, July 2 (Reuters) - The dollar held firm near four-week highs against a basket of currencies on Tuesday, supported by expectations an end in U.S. monetary stimulus will boost U.S. bond yields, pulling back investors who have been seeking higher returns elsewhere.
The Australian dollar tumbled to a near three-year low after the Reserve Bank of Australia kept the door open to interest rate cuts and tried to talk down the currency.
“Expectations on the Fed’s policy will probably go back and forth, depending on upcoming economic numbers. Still, it seems reasonable to think U.S. bond yields are gradually rising, which should underpin the dollar,” said a trader at a Japanese bank.
The dollar index stood at 83.045, almost flat on the day and a tad below the four-week peak of 83.344 reached on Friday, with support seen at 82.915, the bottom of the daily Ichimoku charts.
The euro held firm for now at $1.3062 after a 0.4 percent gain on Monday, keeping some distance from last week’s trough of $1.29845, its lowest since early June.
The common currency was helped by Monday’s euro zone manufacturing reports, which showed encouraging signs out of debt-burdened peripheral euro zone countries such as Spain and Italy.
Nevertheless, the euro stayed below chart resistance at $1.3106, the 100-day moving average, and the 200-day average at $1.3074.
The euro firmed against the yen to reach a three-week high of 130.485, testing resistance around 130.45, the 61.8 percent retracement of its May 22 - June 13 decline. It last stood at 130.44.
The U.S. ISM report also rebounded from an unexpected contraction in May.
But hiring was the weakest in nearly four years, underscoring the challenges facing the U.S. economy. The Fed has made unemployment a key barometer for when it might start scaling back on asset buying.
Which is why the market is likely to become thinner and thinner into the monthly payrolls report on Friday. A strong reading would boost the dollar by fanning speculation about an early paring back of the Fed’s $85-billion-a-month bond-buying.
In contrast, the European Central Bank is likely to emphasise at its monthly meeting on Thursday that the euro zone economy still needs help.
The dollar ticked up 0.15 percent to 99.81 yen, near a four-week high of 99.87 hit on Monday, thanks to improved risk sentiment after solid manufacturing data from U.S., Europe and Japan, though it has been unable to break strong offers in the 99.90/100.00 area for now.
Although the yen is seen under pressure from the Bank of Japan’s aggressive monetary easing, traders say the market may need a fresh impetus to sell the Japanese currency after its steep decline in the past half year.
Concerns over a slowdown in China and other emerging markets could sour investors’ risk sentiment and spark another rally in the yen, as it did in May, said Takako Masai, forex manager at Shinsei Bank.
“I do not expect the yen to sharply weaken beyond 100 per dollar,” she said, noting that two-year yield gap between the two currencies remained small by historical standards, despite recent rise in U.S. bond yields.
The Australian dollar fell 0.7 percent to $0.9172, stepping back towards a three-year low of $0.9110 hit on Monday after the RBA said the currency is still high, despite a 13 percent fall against the U.S. dollar since April.
It left the main cash rate steady at a record low 2.75 percent for a second month as expected.