* Yen outlook dims, investors wary of further BOJ easing
* ECB eyed for liquidity, growth comments
* U.S. private sector shed 169,000 jobs in November
* ECB policy meeting, U.S. nonfarm payrolls loom (Updates prices, adds comment, changes byline)
By Gertrude Chavez-Dreyfuss
NEW YORK, Dec 2 (Reuters) - The U.S. dollar rose sharplyagainst the yen on Wednesday after Japan's prime minister said the yen's rise cannot be left "as it is," prompting speculation Japan may take more quantitative easing measures.
In general, quantitative easing undermines a currency's value because it expands money supply to levels that could potentially lead to high inflation.
"The bias toward yen strength that was prevalent the last few weeks has turned, especially after the Bank of Japan announced those quantitative easing measures yesterday," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida.
"Any time you mention QE, that's bad for a currency. So I think the risk for dollar/yen going into the end of the year is definitely to the upside."
The U.S. currency also gained against the euro, as weakness in the Dow and S&P 500 rekindled demand for the greenback as a safe haven. Investors were particularly concerned about the outlook for the financial sector, particularly after Sanford Bernstein put out a less bullish research note on JP Morgan.
Traders were also hesitant to push the euro higher before Thursday's European Central Bank policy meeting, when the bank is expected to announce details of how and when it will remove excess liquidity from the system.
The market's focus, however, remained on the yen in the wake of remarks from Japanese Prime Minister Yukio Hatoyama.
On Wednesday, Hatoyama said it was unclear if the yen's recent rise was temporary but it could not be left "as it is," the Nikkei business newspaper reported on its website.
Japan's Chief Cabinet Secretary Hirofumi Hirano later downplayed Hatoyama's remarks and said they were not a comment about currency intervention. That, however, did not deter investors from selling the yen.
In early afternoon trading, the dollar rose 0.8 percent to 87.32 yen, pulling further away from a 14-year low of 84.82 yen hit on electronic trading platform EBS last week. Traders said a break above 87.50 yen would trigger pre-placed buy orders and herald a stronger push higher.
The Bank of Japan's measures unveiled on Tuesday to combat deflation and keep short-term interest rates down also prompted investors betting on a stronger yen to square positions.
There are "concerns about the risk of further quantitative measures from the Bank of Japan or even intervention, which were exacerbated by the (PM) comments overnight and by the Bank of Japan's policy announcement yesterday," said Daniel Katzive, currency strategist at Credit Suisse in New York. "That's made the market a little bit nervous."
The ICE Futures' dollar index <.DXY>, which measures the greenback against a basket of six other major currencies, was up 0.4 percent on the day at 74.623, not far from last week's nearly 16-month low of 74.170.
The euro rose 0.5 percent to 131.37 yen. Against the dollar, it was down 0.3 percent at $1.5044.
A senior International Monetary Fund official said on Wednesday the euro was on "the strong side" against the dollar, echoing a view expressed in an IMF report the previous day.
Earlier, a report showed the U.S. economy shed 169,000 private-sector jobs in November. While that was fewer than the 195,000 lost in October, it was higher than an economists' forecast for a loss of 155,000.
Markets are now looking to Friday's release of the U.S. November non-farm payrolls report. Analysts have forecast fewer job losses of 130,000 last month, down from 190,000 cuts in October. (Reporting by Gertrude Chavez; Additional reporting by Wanfeng Zhou; Editing by Jan Paschal) ((gertrude.chavez@thomsonreuters.com; +1 646 223 6322;
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