(Reuters) - The dollar bounced back on Wednesday from 2-1/2-month lows against the Japanese yen after upbeat U.S. manufacturing data soothed fears the economy was slowing, though gains were minimal ahead of the next set of figures including payrolls.

The Institute of Supply Management report showed the strongest rate of U.S. factory growth in 10 months, a surprise after a string of disappointing data and countering speculation the Federal Reserve will embark on a third round of bond buying to bolster the economy.

After the surprisingly strong ISM number, the next job data will be more important than usual. If it is strong, it could cement expectation of strong recovery at least in the United States, said Mitsuru Saito, chief economist at Tokai Tokyo Securities.

The payroll data is due on Friday, with economists looking to a job increase of around 170,000 in April, after a disappointing gain of 120,000 in March.

If the job data sparks risk-on mood, that should lead to the yen's fall and rise in bond yields. This weekend has a chance of triggering such a trend, he added.

The dollar rebounded above 80.00 yen and last stood at 80.320. Its recovery from a trough of 79.640 yen hit on Tuesday caught speculators short and forced them to buy back the dollar.

The market is showing a straightforward reaction to the ISM numbers. But with the payroll data looming ahead, you can't expect the dollar to keep rising, said Sumino Kamei, senior currency strategist at the Bank of Tokyo-Mitsubishi UFJ.

The dollar extended gains further after a Moody's official said the lack of a sales tax increase in Japan could bring forward the day of reckoning in the Japanese government bond (JGB) market.

Chartists say if the payroll data helps the dollar to end the week above 80.42, the cloud top on weekly Ichimoku charts, it could put the greenback on track for further recovery after this week's fall below that decisive level.

On the other hand, if it falls below 79.55-60 area, its high after Japan's October 31 dollar-buying intervention and the 100-day moving average, that in turn could fan bearish mood on the dollar.


The dollar index .DXY, a measure of the dollar against a basket of major currencies, also stood off a two-month trough of 78.603 hit on Tuesday. It last stood at 78.883, almost flat on the day.

The euro retreated slightly to $1.3211 as traders tried to hunt for stop-loss orders, slipping from a one-month peak of $1.3284 hit overnight.

The euro's fortune is seen largely hinging on Thursday's European Central Bank meeting and weekend elections in Greece and France, on top of Friday's U.S. job report.

Francois Hollande, front-runner and first-round winner in the French presidential race, has promised to shift the debate in Europe towards promoting growth if he is elected, which has sparked worries of potential tensions between Berlin and Paris.

But others have played down such fears, noting that Germany appears to be relaxing its focus on austerity.

Potentially more unpredictable is the election in Greece, where the two main parties supporting a bail-out are thought to have only a wafer-thin lead to form a coalition government over smaller parties opposed to the program.

A failure to win a majority by the two parties that support the bailout scheme by the international lenders would open a can of worms for policymakers and send the euro reeling, market players said.

The Australian dollar was nursing heavy losses after the Reserve Bank of Australia's surprisingly large 50 basis-point rate cut on Tuesday.

It showed limited reaction to a slight upgrade in HSBC's China PMI from the preliminary figure and last traded at $1.0350 after suffering a near 1 percent fall on Tuesday, the biggest one-day decline in six weeks.

(Additional reporting by Cecile Lefort in Sydney and Masayuki Kitano in Singapore; Editing by Sanjeev Miglani)