* Investors square positions ahead of U.S. data
* Friday's U.S. jobs report the key focus this week
* Dollar reverses gains vs yen after hitting 4-month high
(Updates prices, adds quote, changes byline, dateline; previous LONDON)
By Gertrude Chavez-Dreyfuss
NEW YORK, Jan 4 (Reuters) - The dollar weakened on Monday, after trading higher earlier in Asia, as investors locked in recent gains ahead of U.S. economic data this week that could firmly dictate the currency's direction in the coming months.
Optimism about the prospects for a U.S. recovery has supported the dollar recently but analysts said more evidence of a strengthening economy was needed to justify further gains.
Analysts also said an upbeat manufacturing survey out of the euro zone underpinned the euro, while a renewed rally in commodities, particularly crude oil, prompted buying of commodity currencies such as the Australian and Canadian dollars.
"Investors are squaring positions ahead of some key numbers." said Omer Esiner, senior market analyst at Travelex Global Business Payments in Washington.
"Obviously, the jobs number will headline this week's data but we do have some numbers that will either confirm that a U.S. recovery is gaining traction or could dampen some of the recent enthusiasm that the dollar enjoyed."
Investors were jittery in a busy week for U.S. data that
begins on Monday with the Institute for Supply Management's
December manufacturing index and culminates in the closely
watched monthly jobs data on Friday.
In early New York trading, the euro
The single currency recovered from earlier falls, which took it as low as $1.4258, testing a key chart support level around $1.4229 where the 200-day moving average sits, and in sight of December's low around $1.4218.
A euro zone purchasing managers' survey, which confirmed the region's manufacturing sector expanded at its fastest rate in 21 months in December [ID:nLDE6030JH], also helped the euro against the dollar.
The ICE Futures' dollar index <.DXY>, a gauge of the greenback's performance against six other major currencies, fell 0.6 percent to 77.425.
Against the yen, the dollar traded down 0.4 percent at
92.61 yen
Higher longer-dated U.S. Treasury yields had underpinned
the dollar, particularly against the yen, traders said, with
benchmark Treasury yields rising above 3.9 percent on Thursday,
in sight of last year's high of 3.95 percent. [US/]
The dollar has moved mostly higher since figures early last month showed the U.S. economy shed a far fewer-than-expected 11,000 jobs in November.
The jobs report along with other above-forecast U.S. data releases have prompted some economists to conclude that employment growth may have commenced in December, but this is still the minority view.
The median forecast of analysts polled by Reuters is for payrolls to have fallen by 20,000 in December, which would be worse than November's decline of 11,000 jobs. However, the predictions ranged widely, from a loss of 80,000 jobs to an increase of 50,000. [ECI/US] (Additional reporting by Jessica Mortimer in London; Editing by Andrea Ricci)