LONDON: The dollar firmed to near a 4-1/2 year high against a basket of currencies on Friday, with its near-term fortunes hinging on whether US jobs data due later in the day will endorse optimism about the US economy.
Recent US data has remained strong, especially labour market indicators, suggesting that the unemployment rate is due for a sharp decline.
That would be likely to bolster views that the US Federal Reserve is on course to raise interest rates next year due to a steadily recovering economy, boosting the dollar.
The dollar index touched a high of 88.174, its strongest level since June 2010.
It last traded at 88.05, slightly higher on the day. It has gained almost 12 percent from a low hit in May as the Fed wound up its policy of flooding the market with cash last month.
The index could well rise above its 2010 peak of 88.708 if the U.S nonfarm payrolls number points to solid recovery in the job market. Economists expect gains of 231,000 in October.
"We are expecting a reading of 240,000 and anything above that, in the region of 250,000 could send the dollar higher," said Geoff Yu, currency strategist at UBS, London.
Against the yen, which has come under pressure after the Bank of Japan surprised markets by expanding its easing programme a week ago, the dollar was steady at 115.20 yen.
It set a seven-year high of 115.52 yen on Thursday on trading platform EBS.
After its sharp rally over the past week, the dollar might retreat against the yen if payrolls turn out in line with or below expectations, said Divya Devesh, FX strategist for Standard Chartered Bank in Singapore.
"But I don't think there will be a big correction. People are still going to be interested in buying on dips," Devesh said.
OPTIONS SHOW MORE EURO WEAKNESS
The euro languished below $1.24, near two-year lows after European Central Bank President Mario Draghi on Thursday renewed a pledge to take necessary steps to support the euro zone economy.
The euro was at $1.2390, having fallen to $1.2364, its weakest since August 2012. In the currency derivatives market, indicators were showing the euro on course for more losses in the near term.
The one-month euro/dollar implied volatility, a gauge of how sharp swings are likely to be, jumped to four-month highs of 8.65 percent.
The one-month risk reversal - a gauge of demand for options betting on more strength or weakness -indicated a significant bias for euro weakness.
Draghi said the ECB aims to increase its balance sheet towards March 2012 levels, when it topped 3 trillion euros - a trillion higher than currently.
"The ECB's current (stimulus) programmes would not be enough to achieve that balance sheet target.
And considering downside risks to prices, the ECB will likely start sovereign bond quantitative easing," said Shin Kadota, chief FX strategist at Barclays in Japan.
Draghi said ECB members all stand ready to take more policy action if needed, shrugging off concerns over internal rifts on starting such a programme.
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