* UK jobs data drive sterling higher
* Australian dollar jumps as inflation pares rate-cut risk
* Canadian dollar drops to more than 4-year low
By Gertrude Chavez-Dreyfuss
NEW YORK, Jan 22 (Reuters) - The dollar edged higher on Wednesday, helped by sharp gains against the Canadian currency as the greenback's outlook stayed upbeat, with the Federal Reserve possibly a week away from its next round of reduction in asset buying.
The U.S. currency jumped to its highest in more than four years versus the Canadian dollar after the Bank of Canada left the door open about a possible interest rate cut and said the unit remained strong despite recent depreciations.
"The BoC policy announcement today was about as dovish as it could possibly be without moving to an outright easing bias," said Shaun Osborne, chief currency strategist, at TD Securities in Toronto.
"We remain bullish on the outlook for the U.S. dollar against the Canadian dollar. The policy outlook favors more U.S. dollar strength and more Canadian dollar weakness."
In contrast to the BoC, the Fed's tapering program remained on track, supporting the greenback overall. Many in the market expect the Fed to slow its monthly bond purchases to a $65 billion pace from $75 billion at its policy meeting next week.
The dollar index, a measure of the dollar's value against six major currencies, drifted higher on the day at 81.155 . The index has been trading in narrow ranges all week.
The greenback soared to C$1.1092, its highest since early September 2009. It was last at C$1.1075, up 1.0 percent.
"The market is still comfortable adding to long positions on the dollar as the Fed tapering remains on track," said Vassili Serebriakov, currency strategist at BNP Paribas in New York.
Sterling and the Australian dollar were also big movers on Wednesday after robust economic numbers that spoke for tighter monetary policy in their economies. The pound surged to a three-week high versus the dollar while the Aussie dollar rose to a one-week peak.
Wednesday's figures showed that UK unemployment slid to within a whisker of the level at which the Bank of England has said it might consider a rise in interest rates, driving sterling - the best performing major currency the past six months - higher against both the euro and dollar.
Sterling last traded at $1.6579, up 0.6 percent, while the euro fell 0.7 percent to 81.70 pence.
Regardless of another warning by the UK central bank that it is in no hurry to raise rates which have been at rock bottom since 2008, the jobless figures added to a growth picture that is far brighter than most of mainland Europe.
The largest quarterly rise in inflation in over two years, meanwhile, has dampened expectations of further cuts in rates in Australia and helped the Aussie gain almost 1 percent earlier, all but erasing this year's losses.
AUSSIE RATE CUT VIEW
The Aussie had stolen the limelight in early trade, rallying against its U.S. counterpart after an unexpected spike in inflation led investors to cut back bets on another interest rate cut. The Aussie was last up 0.5 percent at US$0.8854.
The Australian and Canadian dollars are seen weakening in 2014 despite an improving global economy, with their prospects likely to be tied more closely to shifts in monetary policy at home than demand for their commodity exports.
Earlier, the Bank of Japan kicked off the central bank action on Wednesday, holding its policy meeting overnight and retaining its plan for a 60-70 trillion yen annual rise in monetary base. The dollar last traded up 0.1 percent at 104.41 yen.
- Canadian dollar
- Australian dollar