* Dollar holds most gains vs euro, currency basket
* Greenback supported after strong payrolls
* But analysts see consolidation ahead of Fed meeting
(Adds comment, details, updates prices)
By Kirsten Donovan
LONDON, Aug 10 (Reuters) - The dollar slipped against the
euro and a basket of currencies on Monday on modest
profit-taking but held much of its gains following a broad rally
late last week on surprisingly strong U.S. jobs figures.
Despite slipping a touch against the yen, the U.S. currency
remained supported by data showing a smaller-than-expected fall
in U.S. payrolls, which suggested employment may be turning the
corner after months of extreme weakness.
Investors were waiting to see if the dollar's latest move
was a sign of a breakdown of the recent correlation between the
U.S. currency and risk demand -- in which economic data
suggesting an improving global economy would batter a dollar
trading off the ensuing pick-up in risk appetite.
"It could be a decisive moment for the dollar," said Nordea
strategist Niels Christensen.
"The focus could be shifting from risk appetite to interest
rate expectations, interest rate differentials, which is an
important long-term factor for all currencies."
He added that investors were waiting for more economic
numbers that would support the current optimistic mood as well
as U.S. rate hike expectations that are priced into the market.
By 1121 GMT, the euro <EUR=> was 0.1 percent higher at
$1.4200, but not far off a one-week low around $1.4154 hit on
electronic trading platform EBS in the aftermath Friday's data.
The euro brushed off a surprisingly strong reading of euro
zone sentiment on Monday. The Sentix index produced a -17
reading for August, improving from -31.30 last month.
The pair traded well off the year's high of $1.4448 hit
earlier last week, with a 0.5 percent fall in European shares
<> on Monday helping to limit gains in the euro.
Against a currency basket <.DXY>, the dollar was 0.2 percent
lower at 78.847.
ING strategist Tom Levinson in a research note said that a
return to the 81.0-85.0 area for the dollar index served as a
"first tentative target" to mark the start of more fundamental
based trading for the greenback.
The dollar inched down 0.4 percent against the yen <JPY=> to
97.21 yen, after rallying as high as 97.79 yen, its strongest in
nearly eight weeks, on Friday.
Dollar selling by Japanese exporters in the Tokyo session
weighed on early dollar/yen trade, market participants said.
Some analysts said a post-payrolls rise in Treasury yields
helped to support the dollar as it increased the appeal of U.S.
debt for some investors, including those from overseas.
FED AWAITED
Analysts said that whether the dollar extends its latest
gains may hinge on the actions of the Federal Reserve, which
ends a two-day policy meeting on Wednesday.
The central bank is seen holding the fed funds rate at
0-0.25 percent, and some say it may try to discourage
speculation of a near-term rate rise, after the payrolls boosted
expectations of possible monetary tightening [].
Markets are currently fully pricing a 25 basis point rate
hike by the end of January <FEDWATCH>.
Barclays Capital said the proximity of the payrolls and the
Fed meeting may explain the dollar's broad jump.
"Our US economists expect no increase in asset purchases and
a more upbeat tone on the economy," they said in a note.
"In our view this would likely be a USD positive and may
herald a period where positive news for U.S. yields continues to
be a USD positive."
The Bank of Japan will announce its rate decision on
Tuesday, while Norway's central bank will end a policy meeting
on Wednesday.
(Editing by Victoria Main)
