NEW YORK (Reuters) - The dollar gained against a broad swath of currencies on Tuesday as a recent string of generally solid U.S. economic data gave more credence to the view that the Federal Reserve will scale back its stimulus measures sooner than expected
The greenback rallied to a one-month high against the yen, with gains accelerating as it rose above the key 100-yen level for the first time since June 5 on growing expectations about a reduction in the Fed's quantitative easing program.
The probability of a reduction in the Fed's monthly $85 billion asset purchase program has lifted U.S. bond yields and enhanced the appeal of dollar assets, especially as other major central banks continue to lean toward further monetary easing.
"Our sense is that the Fed comments and recent economic data are still consistent with the tapering message and that's positive for the dollar," said Vassili Serebriakov, currency strategist at BNP Paribas in New York.
Nevertheless, the head of the Federal Reserve Bank of New York repeated comments he made last week, reiterating in a speech that the U.S. central bank will likely continue to support the economic recovery for some time to come despite market worries that it would soon pull back.
Data this week so far showed a rebound in U.S. manufacturing and a rise in factory orders, suggesting the sector was stabilizing.
"The dollar has also been supported by the contrast in monetary policy between the Fed and the other major central banks. The U.S. is moving to a less dovish direction, while the other central banks are staying dovish or becoming even more dovish," Serebriakov added.
In early afternoon New York trade, the dollar rose 1.0 percent to 100.64 yen, after hitting a peak of 100.72, the highest since June 3.
The U.S. nonfarm payrolls report was the key focus of the market, with investors expecting creation of 165,000 jobs in June and a lower unemployment rate at 7.5 percent <ECI/US>
Investors have been buying dollars ahead of Friday's data after the Fed at its June 19 policy meeting lowered its unemployment rate forecast for 2014 to 6.5 percent.
"A drop in the unemployment rate would confirm that the U.S. economy is moving in the right direction and the Fed is on course to reduce asset purchases in September," said Kathy Lien, managing director at BK Asset Management in New York.
The dollar index .DXY hit 83.498, its highest since May 31 and was last at 83.469, up 0.5 percent.
U.S. financial markets will close early on Wednesday and remain closed on Thursday in observance of the U.S. Independence Day holiday. Lower volume could spark greater volatility, especially with the release of Friday's jobs data.
Foreign exchange options are looking at ranges 2.5 times a "normal" day for Friday's range on euro/dollar and three times a "normal" day for the dollar/yen, according to Alan Ruskin, head of foreign exchange strategy at Deutsche Bank in New York.
"Normal" refers to the range that is expected for days where there are no special events.
"Even given risks of holiday-induced reduced liquidity, this looks way too high, notably on euro/dollar, given Fed Chairman Bernanke has already let the tapering cat out the bag, and the data may vary the timing of the start to tapering by a single FOMC meeting, but probably not more," Ruskin said.
The euro, meanwhile, fell to $1.3008, down 0.4 percent. Resistance was at the 200-day moving average at $1.3074, with traders wary before a European Central Bank meeting on Thursday. <ECB/INT>
Analysts expect the ECB to keep interest rates steady and some, such as strategists from HSBC Bank, said the central bank is likely to remain cautious about reacting to recent volatility in financial markets through monetary policy.
Some of the recent euro zone data such as the purchasing managers index and consumer confidence were more upbeat than the numbers heading into the June ECB meeting, which could persuade the ECB to hold off on further easing for now.
Against the yen, the euro was up 0.6 percent at 130.96 yen.
Meanwhile, the Australian dollar fell 1.1 percent to US$0.9140, not far from Monday's three-year low of US$0.9110, after the Reserve Bank of Australia kept the door open to rate cuts, in part due to a still-high currency.
The Canadian dollar also stayed on the defensive, with the greenback hitting a 21-month high of C$1.0578. The U.S. dollar was last at C$1.0532, up 0.4 percent.