SYDNEY (Reuters) - The U.S. dollar held onto overnight gains early in Asia on Friday, having posted its biggest one-day rally in a month after a batch of upbeat economic data supported the Federal Reserve's plan to start reducing stimulus this year.
U.S. Treasury yields jumped, while the dollar index .DXY rose 1.1 percent to its highest in about two weeks after a closely watched ISM survey showed factory activity at a two-year high in July.
The ISM employment index reached its highest since June last year, while a separate report showed first-time applications for jobless benefits hit a 5-1/2-year low last week, boding well for the influential nonfarm payrolls report due later on Friday.
"We think risk-reward is increasingly favorable for establishing new long USD positions versus core currencies," said analysts at BNP Paribas.
"To be sure, Friday's July jobs report represents a final significant event risk for the dollar ... and our estimate of 165,000 payroll growth is below the 185,000 consensus. However, we think numbers in line with our estimate will not be unduly damaging for the USD."
The broad rally in the dollar saw the euro drop 0.6 percent to a low around $1.3192, while the yen fell towards 100 per dollar, well off this week's high around 97.58 per dollar. The euro last traded at $1.3209, while the dollar fetched 99.46 yen.
The outcomes of the European Central Bank and Bank of England rate reviews on Thursday offered no surprises, with both central banks leaving their benchmark rates unchanged at 0.5 percent.
The ECB affirmed it will keep rates low for an extended period and could still cut if necessary, while the BoE left investors waiting for an expected announcement next week of a new strategy to get Britain's economy back in shape.
Among the biggest movers, the New Zealand dollar fell about 1 percent to a two-week low of $0.7853.
The Australian dollar, already on the back foot, dipped to a fresh three-year low of $0.8907 before recovering a bit to last stand at $0.8939. It was on track to end the week down more than 3 percent.
Analysts in a Reuters poll conducted this week were unanimous in expecting a quarter point rate cut at Tuesday's Reserve Bank of Australia policy meeting. <AU/INT>
Slower growth in China, Australia's top export market, a domestic economy that is growing below potential and a tame inflation outlook mean the RBA has room to lower its cash rate to a record low 2.5 percent.
The data flow out of Asia on Friday is mostly second tier, leaving the focus on U.S. jobs.
Editing by Chris Gallagher