FOREX-Dollar declines ahead of Friday's U.S. jobs report

Reuters

* Dollar knocked off two-week highs vs currency basket

* But greenback hits peak vs yen last seen in January

* Yellen says Fed's commitment still needed for some time (Adds quotes, late yen gains, data details)

By Michael Connor

NEW YORK, April 1 (Reuters) - The dollar eased on Tuesday as currency traders looked ahead to key U.S. jobs data due Friday and shrugged off a report showing growth at U.S. factories accelerating.

The dollar index slipped 0.02 percent to 80.086, off a two-week high of 80.296 on Monday, when Federal Reserve Chair Janet Yellen defended America's loose-money policies and rained on hopes U.S. interest rate increases may start in early 2015.

The euro was helped by data signalling easing price pressures in the euro zone and rose for a third day against the dollar, by 0.17 percent in New York trading to $1.3793.

Against the yen, the dollar touched a high of 103.71 yen , its best since Jan. 23, after a report showed U.S. factory growth increasing for a second straight month.

"It is consistent with an economy making progress but one growing between 2 and 2.5 percent. That's respectable but not as much as the Fed would like," said Richard Franulovich, senior currency strategist at Westpac Banking Corp in New York.

In contrast to the U.S. factory data, which lifted Wall Street stocks and some U.S. Treasury yields, comparable reports from Europe had manufacturing slowing in March and factory output in China contracting for a third straight month.

But currency traders paid little heed and were looking ahead to the March U.S. nonfarm payrolls scheduled for release on Friday, according to Shaun Osborne, foreign exchange strategist at TD Securities in Toronto.

"The focus is on U.S. data," Osborne said.

In earlier trading, the yen had been hurt by Japan's Tankan survey that raised doubts about whether economic activity will continue to improve. The survey will keep alive expectations the Bank of Japan may ease policy further if the pain from a sales tax hike proves worse than expected, analysts said.

"If there is clear weakness in the economic data from Japan, we could see the BOJ ease policy," said Yujiro Gato, currency strategist at Nomura. "But we do not expect that policy easing to take place anytime soon, perhaps in the third quarter."

"So those expecting the BOJ to ease in the short term could be in for a disappointment. But any dips in dollar/yen should be bought into, and we eventually expect it to rise to 104 yen."

In a fresh setback for dollar bulls, Yellen said on Monday "considerable" slack still existed in the U.S. jobs market and further monetary stimulus could be effective. Her comments somewhat countered those made last month when she suggested the possibility of rate hikes from early 2015.

Still, with the Fed on track to withdraw monetary stimulus, any further easing by the BoJ is expected to weigh on the yen, said Jane Foley, senior currency strategist at Rabobank.

The euro rebounded from Monday's low of $1.3721. Most traders do not expect the European Central Bank to ease policy on Thursday, despite the drop in inflation last month to 0.5 percent.

The euro was up 0.61 percent against the yen at 143 yen .

(Additional Reporting By Anirban Nag in London; Editing by Nick Zieminski and James Dalgleish)

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