* Dollar holds most gains vs euro, currency basket
* Greenback supported after strong payrolls
* Analysts see consolidation ahead of Fed meeting (Adds comment, details, updates prices)
By Nick Olivari
NEW YORK, Aug 10 (Reuters) - The dollar gained for the third straight day against a basket of currencies on Monday as investors traded on strong U.S. jobs numbers from Friday while awaiting the Federal Reserve's statement after its policy meeting later this week.
Analysts said whether the dollar extends its latest gains may hinge on the actions and words of the Fed, which ends a two-day meeting on Wednesday.
The U.S. currency posted strong gains on Friday and was supported as the new trading week opened by data showing a smaller-than-expected fall in July 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.
"The currency's weak reaction to Friday's stronger-than-expected non-farm payrolls was interesting; highlighting for the first time in many quarters that good news for the U.S. economy might finally be positive for the U.S. dollar," Camilla Sutton, currency strategist at Scotia Capital in Toronto, said in a research note. "We will have to see more evidence that this is how the market is now prepared to trade currencies."
Midway through the New York session, the dollar was 0.2 percent higher at 79.179 <.DXY> against a basket of currencies.
The euro
The dollar inched down 0.2 percent against the yen
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.
Sterling fell below $1.65 for the first time in a week,
extending losses that were triggered last week by the Bank of
England's surprise expansion of its quantitative easing
program. The pound fell as low as $1.6489
Analysts said some of Monday's trading was based on technical levels.
"The dollar index is coming off a deeply oversold condition and bounced off the bottom of the Bollinger Bands," said Andrew Bekoff, chief investment strategist at Family Office Group in New York. "We have seen that rally take us back to the 20-day moving average at 78.79."
FED AWAITED
Analysts said that whether the dollar extends its latest gains may hinge on the actions of the Federal Reserve.
The central bank is seen holding the fed funds rate at the 0-0.25 percent level, and some analysts say it may try to discourage speculation of a near-term rate rise after the payrolls boosted expectations of possible monetary tightening [ID:nN07416548].
Markets are currently fully pricing a 25-basis-point rate
hike by the end of January
Barclays Capital said the proximity of the payrolls report and the Fed meeting may explain the dollar's broad jump.
"Our U.S. economists expect no increase in asset purchases and a more upbeat tone on the economy," Barclays 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. (Additional reporting by Kirsten Donovan in London; Editing by Dan Grebler)