* Dollar index hovers near 10-month peak after rally
* Nonfarm payrolls data next major focus
* China PMI to take centre stage in Asia
By Ian Chua
SYDNEY, Aug 1 (Reuters) - Dollar bulls took a breather early 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 81.449, having risen 2.1 percent in July to a 10-1/2 month peak of 81.573. The dollar bought 102.78 yen, after peaking at a four-month high of 103.15.
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 a step down from 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.
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 traded at $1.3389, steadying near a nine-month trough of $1.3366 plumbed earlier in the week.
Working against the common currency was 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.
Broad strength in the greenback has pushed the Australian dollar to a near two-month low of $0.9280, well off its July peak of $0.9505.
The Aussie could make a comeback if a survey on China's vast factory sector, due at 0100 GMT, shows activity expanded at the fastest pace in eight months in July, as suggested by a Reuters poll. (Editing by Shri Navaratnam)