FOREX-Dollar rises vs yen as jobless data boosts optimism

Financial markets in Asia, Europe and the U.S. will be closed on Friday, Jan. 1, for the New Year holiday.

Full coverage of global foreign exchange markets [FRX/] will resume out of Tokyo on Monday, Jan. 4.

* Dollar breaks 93 yen for first time since September

* Greenback down about 4 percent in 2009

* Dollar index up 3.5 pct in Dec; U.S. rate outlook key

* Jobless claims data boosts hopes for U.S. recovery (Updates prices, adds detail about jobs data, comment)

By Steven C. Johnson

NEW YORK, Dec 31 (Reuters) - The dollar hit a 3-1/2-month peak against the yen on Thursday after data showed initial applications for U.S. jobless benefits fell to their lowest level since mid-2008, lifting optimism about the U.S. economy.

The greenback also erased earlier losses against the euro and was headed for its best month against a basket of major currencies since January <.DXY> on the view that recent strong economic data is a harbinger of strong growth next year and may prompt the Federal Reserve to raise interest rates sooner than expected.

Thursday's report showing that Americans filed fewer jobless claims in the latest week than at any time in 17 months added to that view. For details, see [ID:nN31242308]

"These numbers are very strong -- the best since July, 2008. That shows that the job market is stabilizing," said John Doyle, currency strategist at Tempus Consulting in Washington.

"The price action this morning has been muted just because of the lack of liquidity in the market, but I think going forward, the interest rate expectations in the United States will start to rise and the dollar will gain."

The dollar was up 0.4 percent at 92.92 yen after earlier rising above 93 yen for the first time since early September. The euro fell as low as $1.4308 and was last little changed at $1.4343 , off an overnight peak of $1.4441.

Sterling rose 0.6 percent to $1.6153 while the dollar slipped 0.3 percent to 1.0335 Swiss francs .

TOUGH YEAR ENDS BETTER FOR DOLLAR

The euro was set to finish the year up 2.5 percent against the dollar, although it has shed about 4.4 percent in December.

Against a basket of currencies, the dollar was down 4.1 percent this year, but it was about 4 percent higher in December, its best monthly performance since January 2009.

For most of the year, the dollar fell sharply as investors bet the U.S. economy would lag recovery elsewhere and the Fed would hold rates at record lows for an extended period.

That trend began to change in December with the onslaught of stronger-than-expected U.S. data, and though traders chalk up some of the greenback's gains this month to position-squaring, they also point to a more constructive tone for the currency.

"We could see a partial retracement of December's sharp dollar rally early in 2010, but ultimately further improvement in U.S. data will fuel Fed tightening expectations and support the dollar," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.

The Australian and New Zealand dollars were among the best performers among the major currencies in 2009, rising about 28 percent and 25 percent, respectively, against the dollar.

Next week, investors will look to the release of U.S. monthly payrolls data on Friday, where further indications of an improving U.S. economy could lift the dollar.

"It's going to be a hugely important number," said a trader at an Australian bank in Sydney. "Anything above forecast could see the euro finally break down through $1.42 toward $1.40.

"A weak result would be a real dampener after the run of upbeat figures we've seen. The market would have to rethink the Fed timing again, and that could see the euro back up at $1.4700," the trader said. (Additional reporting by Wanfeng Zhou in New York, Jessica Mortimer in London and Wayne Cole in Syndey; Editing by Leslie Adler)