Dollar supported by strong data, yen struggles

TOKYO, June 4 (Reuters) The dollar stayed near an eight-week high against the euro on Monday after a strong U.S. employment report further trimmed expectations the Federal Reserve will cut interest rates from 5.25 percent this year.

The yen hovered within reach of a 4 1/2-year low against the dollar at 122.00 little changed after giving up earlier gains as investors shunned the yen for overseas assets with higher returns than Japan's paltry 0.5 percent.

A tumble in China's stock market benchmark, the Shanghai Composite Index, of as much as 7.6 percent raised concerns about risk aversion, prompting speculators to trim carry trades, in which low-yielding currencies such as the yen are borrowed to purchase assets offering higher returns.

But yen selling resumed as Asian financial markets on the whole reacted calmly to the slide in stocks.

''We saw some yen buying on risk-reduction trades, but such trades are unlikely to continue,'' said a forex trader at a Japanese bank.

''The market remains fixated on rate differentials, which means the yen is likely to fall further.'' The euro was at $1.3450, flat from U.S. trade on Friday. The pair remained within sight of the eight-week low of $1.3392 hit on electronic trading platform EBS late last week.

The dollar recovered after slipping 0.1 percent to 121.90 yen, and stayed near a four-month high of 122.14 yen hit on Friday. The next focus would be 122.20 yen, a 4 1/2-year high struck in January.

The dollar was supported after data late last week showing gains of a greater-than-forecast 157,000 jobs in May and the strongest manufacturing activity data in more than a year, which offset a tepid U.S. core inflation number for April.

The euro was little changed at 164.05 yen, recovering after easing to 163.90 yen earlier in the day, and hovered near an all-time high of 164.29 yen hit last week.

The Nikkei share average was up 0.15 percent, brushing off the slide in Shanghai stocks.

CENTRAL BANK MEETINGS After a raft of U.S. data, the market focus has shifted to a series of central bank policy meetings later this week.

The European Central Bank is widely expected to lift interest rates to 4 percent from the current 3.75 percent on Wednesday.

Traders said the market has factored in a rate rise and investors would look to comments by ECB President Jean-Claude Trichet for clues about the future path of monetary policy.

''Given recent euro zone data, Trichet is likely to repeat ECB concerns about inflation, signalling more rate tightening to come,'' said Hideki Hayashi, a global strategist at Shinko Securities.

''The euro is likely to recover against the dollar after Trichet's comments,'' Hayashi said.

Central banks in Britain, Australia and New Zealand will also make rate announcements this week, and markets expect all of them to hold interest rates unchanged.

At the same time, the market sees the Bank of England raising interest rates in the summer to 5.75 percent from 5.5 percent, with possibly another rate increase after that.

Sterling rose to a 26-year peak against the dollar above $2.01 in April, supported by the outlook for higher interest rates. On Monday, sterling was flat at $1.9820.

Investors believe the next moves by Australia and New Zealand's central banks will be rate tightening rather than cuts.

Such expectations have pushed the Aussie to its highest level since April 1992 against the low-yielding yen and the kiwi to a 17-year high against the Japanese currency on Friday.

The Australian and New Zealand dollars both were little changed against the yen after both fell as much as 0.2 percent earlier in the session.

REUTERS PV DS1141