FOREX-Dollar rises as short bets unwound before data

* Dollar highest in almost two months against yen

* Fed minutes of key interest

* Little help for euro from solid PMI surveys

* Graphic: World FX rates in 2017

By Saikat Chatterjee

LONDON, July 5 (Reuters) - The dollar rose its highest levels in nearly two months against the Japanese yen on Wednesday as investors reduced bearish bets against the greenback before data this week sheds more light on the ongoing recovery in the U.S. economy.

A gradual rise in short-dated U.S. government bond yields since early June hasn’t been matched by a rise in the currency with a trade-weighted basket of the dollar against its peers moving sideways since then.

Market strategists believe this week may mark a breakout in the dollar’s trend if the data surprises on the upside.

“This should be the dollar’s moment,” said Kit Juckes, a strategist at Societe Generale in London. “If the data is good, we should see the dollar catch up with the rise in bond yields.”

The dollar hopped 0.3 percent higher to trade at 113.59 yen , its highest level in nearly two months. Against the euro , the greenback was broadly flat at $1.13530.

“It may not be only the Fed providing the USD with a lift. June labour market data starting with the release of the ADP report tomorrow, completed by Friday’s NFP (non-farm payrolls), could start turning the U.S. surprise indicator around,” Morgan Stanley strategists said in a note.

Unwinding of short dollar positions was also evident against the euro with the single currency slipping 0.2 percent to a one-week low of 1.13230.

An early boost to the Japanese yen from safe-haven bids after Pyongyang said on Wednesday it had conducted a test of a newly developed intercontinental ballistic missile (ICBM) that can carry a large and heavy nuclear warhead quickly faded.

In other currencies, sterling languished at one-week lows on Wednesday as a tepid reading of Britain’s services sector added to further evidence of growing headwinds to the economy.

Sterling extended a dip below $1.29 after the data was released, falling as much as 0.3 percent lower to $1.2894. .

The Canadian dollar edged lower, trading at C$1.2955 per dollar after having hit a 10-month high of C$1.2912 to the dollar on Tuesday.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url= (Editing by Toby Chopra)