* Dollar headed for best 1-day rise in 3-1/2 months vs yen
* U.S. private sector jobs rise; services index up
* Rise in Treasury yields seen benefiting the dollar
* Portugal borrowing costs soar, Spain issuance on horizon
(Updates prices, adds quotes, background, changes byline)
By Julie Haviv
NEW YORK, Jan 5 (Reuters) - The dollar leaped higher on
Wednesday and could continue to outperform other major
currencies after a slew of optimistic U.S. data indicated that
the world's largest economy was on a steady path to recovery.
The greenback was on pace for its biggest one-day gain
against the yen in more than three months and more than two
weeks against the euro.
The ADP Employer Services report, which showed U.S. private
employers added 297,000 jobs in December, further propelled an
already rising dollar. The ADP number was the largest increase
on record, with data going back to 2000, and far exceeded
market expectations for a gain of 100,000.
It has so far been a banner week for the dollar as upbeat
U.S. economic data and worries about the ability of certain
euro zone countries to sell an abundance of debt worked in
favor of the greenback.
"There is a large appetite for the dollar as it is being
viewed as the growth currency of choice," said Andrew
Wilkinson, senior market analyst at Interactive Brokers in
Greenwich, Connecticut.
In early afternoon New York trading, the dollar index,
which measures the greenback's value against six other major
currencies, was up 0.93 percent at 80.180 <.DXY>. The dollar
surged 1.4 percent against the yen to 83.21 yen <JPY=>.
The euro fell 1.1 percent to $1.3157 <EUR=EBS>, touching
the barrier at $1.3125 with a reportedly $15-$20 million
payout. Traders said the seller of the option, who is on the
hook for the payout, has bought a substantial amount of euros
to try to keep it above $1.3125.
Traders are now focused on taking out an exotic option
barrier at $1.3125 in euro/dollar, a bet that the euro zone
single currency will not fall below that level by 10 a.m. EST
(1500 GMT) on Thursday. Consequently, there has been some
buying of the euro in efforts to defend that number.
Wilkinson said he expects the euro to fall below $1.30 by
the end of the month.
"While core European countries are showing solid growth,
there is a lot of baggage attached to that growth and it has
the potential to explode on sovereign debt woes," he said. "The
rise in Treasury yields, meanwhile, should prove to be a tail
wind for the dollar."
U.S. Treasuries' prices plunged. For details, see
[]
Rising yields tend to support the dollar as they reflect
stronger growth. They also enhance the attractiveness of some
dollar-denominated assets to investors.
A separate report showing the U.S services sector expanded
as well in December also lifted the dollar.
For a wrap-up of U.S. data click on [].
"If, in fact, employment is kicking in, then that would set
the tone for self-sustained growth, underpin interest rates,
and very much underpin the dollar," said Bob Sinche, global
head of FX strategy at RBS Global Banking and Markets in
Stamford, Connecticut.
Analysts said the private sector employment report bodes
well for Friday's U.S. nonfarm payrolls number, which is
expected to show gains of 175,000 overall jobs -- and 180,000
private-sector jobs -- last month. []
Earlier this week U.S. factory orders, construction
spending and a manufacturing index showed stronger readings as
well.
As a result, Sinche said, RBS is "pretty constructive on
the dollar this year." He expects the euro to fall into the low
$1.20s against the dollar by mid-year, while dollar/yen could
rise above 85.
"We're definitely back to a 'buy dollar' mentality and the
market is looking to take out key support levels for the euro,"
said Dean Popplewell, chief currency strategist at OANDA in
Toronto.
One of those support levels is the 200-day moving average
just below $1.31, which has staunchly supported the euro over
the last two weeks and its breach could signal further
selling.
Portugal, another debt-laden euro zone country, has come
under increasing pressure from international debt markets on
concerns it may be forced to follow Greece and Ireland and seek
a bailout. Demand for Portuguese Treasury bills was solid on
Wednesday but yields continued to rise. []
Market focus was shifting to Spanish debt issuance for
2011, the first tranche of which comes up for auction next
week.
(Additional reporting by Gertrude Chavez-Dreyfuss; Editing by
Diane Craft)
