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(Recasts, adds new quote, updates dateline to LONDON from previous TOKYO)
* Euro back above $1.04 after hitting 14-yr low
* U.S. and euro zone data both strong
* Friday's U.S. payrolls report eyed
* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh
By Jemima Kelly
LONDON, Jan 4 (Reuters) - The dollar edged down from a 14-year high against a basket of currencies on Wednesday, with investors cautious about increasing bets on the greenback before getting fresh clues on the U.S. economy and timing of intrest rate rises.
The greenback surged to its highest levels since late 2002 on Tuesday after U.S. manufacturing data beat expectations, once again threatening to reach parity with the euro, which fell to a 14-year low of $1.0340.
The dollar has climbed almost 6 percent since Donald Trump was elected as U.S. president eight weeks ago, on expectations that his new admininsttration will introduce reflationary measures backed by large fiscal spending, prompting the Federal Reserve to follow through with a series of interest rate hikes.
But with investors already pricing in between two and three hikes this year, analysts reckon they will want to see more evidence that growth and inflation are on the rise and that the pace of rate hikes will accelerate before putting on more bets on the dollar.
HSBC, nevertheless, changed their forecasts late on Tuesday to show the euro falling to $1.01 in the first quarter, down from $1.08 previously, though they reckon the dollar will then slip back for the rest of the year, never reaching parity.
The single currency was up 0.3 percent by 0905 GMT at $1.0435, almost a cent above the low hit on Tuesday - the first day of trading in 2017 for most financial centres - but some way off a three-week peak of $1.07 touched during a bout of low liquidity last week.
Investors are focused on flash inflation data for the euro zone due at 1000 GMT after strong numbers from Germany and Spain and robust purchasing managers' index surveys on Monday.
"Yesterday...people came back to work, saw that euro/dollar had moved higher and used that as an opportunity to put back on their dollar longs; today the story is a bit more complicated," said Rabobank currency strategist Jane Foley.
"Yes we've had some good U.S. data, but we've also had stronger German data and the PMIs on Monday were also pretty strong in Europe... Are investors really prepared to push above those 14-year highs to make that extra move down to parity? I suspect the market may need a bit more incentive to do that."
The dollar index - which measures the greenback against a basket of six major rivals - edged down 0.1 percent to 103.08 on Wednesday, having hit a peak on 103.82 on Tuesday.
Against the Japanese yen, the greenback was up 0.1 percent at 117.86 after surging the previous day to a near three-week peak of 118.605 yen.
The dollar was also seen facing potential turbulence ahead of Friday's highly anticipated U.S. non-farm payrolls report.
"The problem is that the run-up to the Fed's first rate hike in a year is now over and while policymakers have signalled plans to raise rates three more times this year, the dollar's sharp rally last quarter invited profit-taking," wrote Kathy Lien, managing director of FX Strategy for BK Asset Management.
For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Additional reporting by Shinichi Saoshiro in Toyko; Editing by Raissa Kasolowsky)