* USD trims losses as dust begins to settle after overnight plunge
* Caution towards yuan, US jobs report limits dollar bounce
* Dollar index on track to end the week down about 0.8 pct
* Aussie gets mild support from upbeat trade data, near 3-wk high (Updates throughout)
By Shinichi Saoshiro
TOKYO, Jan 6 (Reuters) – The dollar crawled up on Friday as the dust settled from its tumble overnight to a three-week low, although gains were limited ahead of the U.S. non-farm payrolls due out later in the session.
The dollar index against a basket of major currencies was up 0.1 percent at 101.610 after dropping overnight to as low as 101.300, its lowest since Dec. 14. It was on track to lose about 0.8 percent on the week.
The index, which had set a 14-year high of 103.820 just three days ago on a seeming resumption of the dollar-bullish ‘Trump trade’, was weakened overnight by lacklustre U.S. employment data. The U.S. currency was also hit by a surge in the Chinese yuan, which some traders suspect was orchestrated by China to shake out large short positions against the currency.
As China works to stem capital flows and stabilise the currency ahead of the Lunar New Year and Donald Trump’s inauguration as U.S. president, the offshore yuan rose the previous day to a two-month high against the dollar to mark the largest two-day rise since its inception in 2010.
“The yuan was a key catalyst that bears watching but it is not the only factor. There were large amounts of dollar long positions, particularly against the euro and yen, that found an opportunity to be unwound,” said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo.
Chinese authorities on Friday ramped up their defense of its currency, with the central bank raising the value of it official guidance rate by the most since the yuan was revalued in 2005.
The move was reminiscent of January 2016, when China’s central bank reversed an earlier depreciation of the yuan -which sent global markets tumbling- and led the currency higher.
“The global economy looks to be in better shape compared to a year ago so the risk-off trend could be limited. But China-related headlines appear to have given participants a chance to adjust positions which had excessively favoured the dollar,” said Shin Kadota, chief Japan FX strategist at Barclays in Tokyo.
China is expected to report December and full-year 2016 foreign exchange reserves on Saturday amid concern over the speed at which it is burning through its dollar cash pile in defence of the yuan.
The greenback was up 0.4 percent at 115.825 yen after falling 1.6 percent overnight. It ranged between a high of 118.605 and a low of 115.060 this week.
The euro was down 0.2 percent at $1.0584 after rallying 1.3 percent the previous day to pull away from a 14-year trough of $1.0340 set on Tuesday.
The dollar has lost support from U.S. Treasury yields, which has pulled back sharply over the past three days from their highest levels since September 2014 marked in December. Yields pulled back as investors grew risk-averse amid uncertainty about the incoming Trump administration.
Treasury yields declined further on Thursday as the ADP National Employment Report showed that U.S. private employers added 153,000 jobs last month, below economists’ expectations for a gain of 170,000.
Investors are now focused on Friday’s U.S. non-farm payrolls report. While economists expected jobs gains of 178,000 in December, wages were also in sharp focus as they were seen as a key factor determining the Fed’s pace of rate hikes this year.
The Australian dollar nudged down 0.2 percent to $0.7327 after gaining 0.7 percent overnight, when it touched a three-week high of $0.7356. The Aussie received some support earlier on Friday after data showed Australia boasting its first trade surplus in almost three years in November.
The New Zealand dollar inched down 0.1 percent to $0.7017 after climbing to a three-week peak of $0.7040.