Dollar at 29-month high versus yen; may rise on U.S. payrolls

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File photo of Japanese 10,000 yen notes spread out next to U.S. dollar bills at an Interbank Inc. money exchange office in Tokyo
Japanese 10,000 yen notes are spread out next to U.S. 100 dollar bills at an Interbank Inc. money exchange office in Tokyo, in this September 9, 2010 file photo picture illustration.

(Reuters) - The dollar extended gains to hit its highest level in nearly 2-1/2 year against the yen and rose versus the euro on Friday after U.S. Federal Reserve minutes indicated growing unease about the impact of further stimulus.

The dollar could gain further if U.S. jobs data, due 1330 GMT, beats expectations. The Fed has embarked on a $1 trillion stimulus program to lower the U.S. unemployment rate, so a strong jobs number may boost chances the Fed could halt its asset buying sooner than expected and help the dollar.

The dollar broke past reported options barrier at 88 yen to hit a high of 88.34 yen, up 1.2 percent on the day and its highest since mid-July 2010. Traders cited more option barriers at 88.50 and 89 yen.

The U.S. currency also rose to a three-week high against the euro. The euro fell 0.2 percent to a low of $1.3006 with near-term support expected at its 55-day moving average of $1.2986, traders said.

Minutes from the Fed's last meeting surprised markets after signaling reluctance among some policymakers to further expand its asset purchases.

In light of the Fed minutes, markets will pay particular attention to the U.S. non-farm payrolls report which is expected to show the American economy added 150,000 jobs in December, according to a Reuters survey, up from November's 146,000.

The unemployment rate is expected to stay at 7.7 percent.

"After the minutes, markets perhaps expect the Fed to reduce its bond purchases or shorten the time it will continue such purchases," said Richard Falkenhall, FX strategist at SEB.

"A strong payroll figure is good for risk appetite as it shows the U.S. economy is recovering, but it will also be dollar positive which is not the traditional relationship," Falkenhall said.

Usually a better-than-expected U.S. data drives the dollar lower against most major currencies. But any recovery in the jobs market could help the dollar as it would lessen the need for more stimulus.

The dollar's broad gains drove its index .DXY, a measure of the U.S. currency's value against six major currencies, to a six-week high of 80.845 with U.S. investment banks cited as major buyers.

YEN WEAKNESS

The dollar's rise post the Fed minutes was especially sharp against the yen. The yen has struggled in recent months on increasing prospects the new government of Prime Minister Shinzo Abe will push to weaken Japan's currency and implement aggressive stimulus.

Further weakness in the yen is likely on the cards as some analysts expect the dollar to remain firm for now.

"We have seen quite a broad-based dollar rally after the minutes which has ignited a fresh debate about how much liquidity the Fed is going to pump into the economy," said Daragh Maher, FX strategist at HSBC.

"Breaking through 88 in dollar/yen is a significant move. It was a target for a number of people in the market and the question is now whether we have a mindset of taking profit or we look to extend," he added.

Some strategists however added that the current yen selling was perhaps overdone and a further fall in the yen will depend on a substantial change in BOJ policy.

The BOJ's next meeting is due January 21-22.

The euro rose also 0.9 percent to 114.80 yen, but was still far below an 18-month high of 115.995 yen set on trading platform EBS on Wednesday.

(editing by Ron Askew)

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