TOKYO The dollar hovered near a 3 1/2-year high against the yen and held an upper hand against other major currencies on Monday after remarkable growth in U.S. employment added to optimism on the U.S. economy.
U.S. employers added a more-than-expected 236,000 workers to their payrolls in February while the jobless rate fell to a four-year low of 7.7 percent.
The report signaled the economy may have developed enough momentum to withstand the blow from higher taxes and deep government spending cuts, fuelling speculation that the U.S. Federal Reserve will tone down its ultra-loose monetary policy sooner than anticipated.
In early Asian trade the dollar changed hands at 96.24 yen, about 0.25 percent above its late U.S. levels and not far from Friday's high of 96.60 yen, which was its highest level since August 12, 2009.
"The market is now speculating when the Federal Reserve will end its quantitative easing. But for that to happen, we'll have to see job growth of more than 200,000 not just in last month but also the next month and the one after," said a trader at a Japanese bank.
The Fed is currently buying $85 billion a month in bonds to push down long-term borrowing costs and spur economic growth. It has said it will keep buying assets until the outlook for the jobs market has improved substantially.
While investors think the Fed's next policy step is to scale back its stimulus, they expect the world's other major central banks to ease policy further.
The Bank of Japan is perceived to be seeking a "new dimension" of easing under new governor Haruhiko Kuroda, who is expected to be appointed this month.
International Monetary Fund head Christine Lagarde said the European Central Bank (ECB) should lower rates, reinforcing speculation of a future rate cut.
The Bank of England is also widely expected to relaunch asset purchase as soon as next month to shore up the fragile UK economy.
The dollar's index against a basket of six major currencies stood at 82.756 .DXY, near seven-month high of 82.924 hit on Friday.
Having risen 4.8 percent since a low hit in early February, the index is seen as on course to test its July 2012 peak of 84.10.
As the dollar firms broadly, the euro was a tad weaker at $1.2986, about 0.15 percent below late U.S. levels after having hit a three-month low of $1.2955 on Friday.
The British pound was just a hair above 32-month low hit on Friday, fetching $1.4902, versus Friday's low of $1.4886.
The Australian dollar slipped following data published on Saturday showed uneven recovery in China. Both industrial output and retail sales fell short of market expectations, leaving fixed asset investment as the key driver of economic growth.
The Aussie shed 0.25 percent in early Monday trade to fetch $1.0210, edging towards eight-month low of $1.0116 hit a week ago.
(Reporting by Hideyuki Sano; Editing by Eric Meijer)