* Dlr adds gains after strong U.S. private sector jobs data
* Euro heavy, focus on euro digital expiry at $1.3125
* U.S. payrolls on Friday to set dollar's direction
(Updates prices)
By Tamawa Desai
LONDON, Jan 6 (Reuters) - The dollar edged up on Thursday,
having surged the previous day on strong U.S. private sector
jobs data, but there is a risk it could pull back if Friday's
broader payroll numbers aren't similarly robust.
A string of robust U.S. data have driven the dollar higher
and underpinned expectations that the world's largest economy
would recover faster than other major economies.
The ADP jobs report on Wednesday showed a record 297,000
private-sector jobs were created in December, boosting
expectations for Friday's official jobs report. U.S. factory and
services sectors' data this week has also buoyed the greenback.
The dollar index, which measures the greenback's value
against a basket of major currencies, was up 0.2 percent at
80.40 <.DXY>, a sharp turnaround from last week's 78.775 trough.
"There have been positive developments for the U.S. economy
pointing to a more sustained recovery, whereas investors remain
concerned about developments in the UK and Europe," said Lee
Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.
"The market expects a significantly strong figure for
Friday's payrolls, but they could be overestimating. So there is
scope for disappointment," he added.
The ADP report drove the dollar's 1.5 percent gain versus
the yen on Wednesday, its biggest one-day rise in three months,
although dollar-selling by Japanese exporters tempered gains.
The dollar shed some of those gains, and was down 0.2 pct on the
day at 83.11 yen <JPY=>.
But the dollar extended gains against the euro, with the
single currency down 0.3 percent at $1.3110 <EUR=>. Traders were
focusing on a digital option at $1.3125 worth some 20 million
euros set to expire at 1500 GMT. This is expected to keep the
single currency in a range.
The next downside target is at $1.3080, the euro's 200-day
moving average.
The single currency got a brief boost after Spanish
newspaper El Pais reported that China was willing to buy about 6
billion euros of Spanish government debt. []
But it barely reacted to mixed economic data that showed
euro zone economic sentiment jumping in December although retail
sales fell in November. []
France saw a smooth auction of 8.975 billion euros worth of
10-, 15- and 20-year government bonds. []
DOLLAR STRENGTH
While the euro is likely to struggle under the burden of
rising euro zone government debt issuances in the coming months,
investors will focus on the strength of forthcoming U.S. data
and whether an economic recovery in 2011 is durable or not.
Crucial to that recovery is the U.S. labour market. U.S.
payrolls on Friday are expected to show overall gains of 175,000
jobs for December, up from a 140,000 forecast prior to the ADP
data. []
"A number around 200,000 would likely spur profit-taking. A
positive surprise of 250,000-300,000 is needed to spur the
dollar higher," one London-based trader said.
Even then, the dollar's gains could be limited unless the
data changes expectations for the U.S. Federal Reserve to keep
its quantitative easing in place through June.
"The release earlier this week of the minutes of the
December FOMC meeting made clear that by last month the Fed did
not view economic conditions as having improved enough to reign
in the $600 bln target for QE2," said Jane Foley, senior
currency strategist at Rabobank.
"One strong payrolls release would most likely be
insufficient to cause the Fed to change policy."
Fed Chairman Ben Bernanke is set to testify on the economic
outlook before the Senate Budget Committee on Friday after the
jobs report.
Sterling fell after an unexpected contraction in UK service
sector output added to concerns over a fledgling economic
recovery in Britain. The pound fell more than half a cent versus
the dollar <GBP=D4> to trade at $1.5480, down around 0.2 percent
on the day. It had shed nearly one percent on Wednesday.
(Additional reporting by Anirban Nag; Editing by Hugh Lawson)
