* Dollar index hovers near 10-month peak after rally
* Nonfarm payrolls data next major focus (Updates prices, adds comments)
By Ian Chua and Masayuki Kitano
SYDNEY/SINGAPORE, Aug 1 (Reuters) - Dollar bulls took a breather on Friday ahead of a closely watched jobs report that has the potential to make or break a rally that saw the greenback post its best monthly performance in over a year.
The dollar index was steady at 81.479, having risen 2.1 percent in July to a 10-1/2 month peak of 81.573.
Against the yen, the dollar edged up 0.1 percent to 102.89 yen but stayed below a four-month high of 103.15 yen struck on Wednesday.
The question now is whether this is the beginning of a lasting uptrend, one that has frustrated dollar bulls for much of this year, or another false start.
The U.S. jobs report due at 1230 GMT could provide a clue. A Reuters survey of economists showed payrolls probably increased by 233,000 in July.
While that would be less than June’s hefty increase of 288,000 jobs, it would still represent a sixth straight month that employment has expanded by more than 200,000, a stretch not seen since 1997.
“If it comes in above 250,000, I think that’s the threshold for a positive surprise,” said Callum Henderson, global head of FX research for Standard Chartered Bank in Singapore.
Such an outcome could lift the dollar to levels around 103.50 to 104.00 yen, he said. Standard Chartered, however, is expecting nonfarm payrolls to increase by a below consensus 200,000, and for the dollar to pull back to levels around 102.50 yen, Henderson added.
With the Federal Reserve playing coy on when interest rates will rise, markets are looking more and more to economic data to make their own bets.
Analysts at BNP Paribas expect payrolls to increase by 225,000. “Data in line with our forecasts should leave markets focused on the possibility that the Fed begins tightening policy in the first half of 2015 rather than waiting to Q3, keeping US front-end rates and the USD supported,” they wrote in a note to clients.
The euro last traded at $1.3388, steadying near a trough of $1.3366 plumbed earlier in the week, its lowest level since last November.
Sentiment toward the common currency was dampened on Thursday by data that showed annual inflation in the euro zone fell in July to its lowest since the height of the financial crisis in 2009.
That should keep the risk of deflation on policymakers’ radar, although it is unlikely to spur the European Central Bank into immediate policy action when it meets next week.
The Australian dollar held steady at $0.9292, having touched a two-month low of $0.9280 on Thursday. The Aussie dollar had fallen 1.4 percent in July against a broadly stronger U.S. dollar.
The Aussie showed a muted reaction to surveys showing an acceleration in Chinese manufacturing activity. A government survey showed that activity in China’s factory sector expanded at the fastest pace in 27 months in July, while a private survey showed that it posted its strongest growth in 18 months. (Editing by Shri Navaratnam and Simon Cameron-Moore)