* Dollar holds firm vs euro near a 1-month high
* U.S. stock gains help market ignore bad economic news
* Japan to scrap taxes for foreign investors - report
By Satomi Noguchi
TOKYO, Jan 7 (Reuters) - The dollar rose against the euro on Wednesday to hover near a one-month high hit the previous day, continuing to draw support from gains in U.S. stocks on hopes for an aggressive stimulus package from the Obama administration.
Persistent signs of economic weakness in the euro zone that may force its central bank to cut interest rates further also helped pushed the euro down against the dollar as well as the yen.
The yen fell towards a one-month low against the dollar, giving up earlier gains on a media report that the Japanese government will seek to scrap capital gains taxes for foreigners investing in Japanese companies through funds, which could encourage capital flows into the country.
The dollar drew strength from early 2009 gains in Wall Street shares, which also helped the currency market to ignore dismal economic data including Tuesday's figures showing a steep drop in factory orders and pending home sales in November.
"U.S. stocks, hopes for Obama, and a reversal of the broad dollar-selling positions made in December will support the dollar, possibly until Obama officially takes office later this month," said Kengo Suzuki, a currency strategist at Shinko Securities.
"But the state of the U.S. economy is so miserable. That will prompt market players sooner or later to question the wisdom of extended dollar buying," Suzuki said.
The Federal Reserve's most recent policy meeting suggested the central bank is concerned that downside risks remain substantial, although that did not dent the overall positive sentiment surrounding the dollar on Tuesday.
Traders will look to the ADP private employment report in the U.S. due later in the day for clues to Friday's nonfarm payrolls data for December from the government.
The euro dropped 0.3 percent to $1.3495, after having tumbled as low as $1.3312 on trading platform EBS on Tuesday, its lowest since Dec. 12.
The euro was pressured after a drop in euro zone inflation boosted expectations the European Central Bank will continue to cut interest rates, which would likely reduce the appeal of the euro zone currency against the dollar and other major currencies.
The dollar index, a gauge of the greenback's performance against six major currencies, rose 0.2 percent to 82.986, in sight of a one-month high of 84.023 touched the previous day.
The U.S. currency had dipped against the yen in early trade on a Nikkei business daily report that the Japanese government plans to submit a bill seeking to end corporate and income taxes on foreign investors who invest via funds.
The plan is aimed at kick-starting foreign investment in Japan, which has slowed amid the global economic downturn, the paper said.
The dollar climbed 0.2 percent to 93.84 yen, rebounding from the day's low of 93.20 yen and moving towards a one-month high of 94.65 yen touched the previous day on EBS.
The Nikkei share average climbed 2 percent, hitting a two-month high. (Editing by Chris Gallagher)