Dollar falls on caution before U.S. data

Optimism about the prospects for a U.S. recovery have supported the dollar recently but analysts said more evidence of a strengthening economy was needed to justify further gains.

Investors were jittery in a busy week for U.S. data that begins on Monday with the Institute for Supply Management's December manufacturing index, due at 1500 GMT, and culminates in closely-watched monthly jobs data on Friday.

People are coming back after the new year, but the market has been slow to settle back in and there's a reluctance to chase dollar strength in a week which includes U.S. payrolls data, said Daragh Maher, deputy head of FX strategy at Calyon.

By 1243 GMT, the euro was up 0.5 percent against the dollar at $1.4396.

The single currency recovered from earlier falls, which took it as low as $1.4257, testing a key chart support level around $1.4229 where the 200-day moving average sits, and in sight of December's low around $1.4218.

A euro zone purchasing managers' survey which confirmed the region's manufacturing sector expanded at its fastest rate in 21 months also helped the euro against the dollar.

The dollar index .DXY, a gauge of the greenback's performance against six other major currencies, fell 0.4 percent to 77.554.

Against the yen, the dollar was trading down 0.2 percent at 92.82 yen cutting earlier gains which lifted it to a four-month high of 93.22 yen on trading platform EBS. Traders said resistance was seen ahead of its 200-day moving average around 93.60 yen.

Higher longer-dated U.S. Treasury yields had underpinned the dollar, particularly against the yen, traders said, with benchmark Treasury yields rising above 3.9 percent on Thursday, in sight of last year's high around 4 percent.

PAYROLLS AWAITED

The dollar has moved mostly higher since figures early last month showed the U.S. economy shed a much lower-than-expected 11,000 jobs in November.

Along with other above-forecast U.S. data releases, this prompted some economists to conclude that employment growth may have commenced in December, but this is still the minority view.

The median forecast of analysts polled by Reuters is for payrolls to have fallen by 20,000 in December, which would be worse than November's decline of 11,000 jobs. However, the predictions ranged widely, from a loss of 80,000 jobs to an increase of 50,000.

Following the surprisingly positive November labor market report, which led to the recovery of the dollar in December, further key data will now have to confirm the market view that the U.S. economy is experiencing a sustainable recovery, Commerzbank analysts said in a note to clients.

In view of the fact that almost all dollar short positions have been squared since early December and that in the mean-time investors have entered into euro shorts ... further dollar gains are likely to become more difficult if the U.S. economic data does not meet the expectations of the markets, they said.