By Shinichi Saoshiro
TOKYO (Reuters) - The dollar was firm on Friday but traders held off on making big bets ahead of the closely-watched U.S. non-farm jobs report that could influence the course of near-term Federal Reserve policy.
The dollar index (DXY) against a basket of six major currencies stood little changed 96.748, having spent the previous day in a tight range as the U.S. financial markets were closed for the Independence Day holiday.
The index had fallen to a three-month trough of 95.843 last week as U.S. Treasury yield slumped to 2-1/2-year lows on expectations the Fed would cut interest rates this year, starting as early as this month.
The focus was now on whether Friday's U.S. jobs report will help make or break the case for a rate cut later in July.
Economists polled by Reuters are predicting U.S. non-farm payrolls to have increased by 160,000 in June from 75,000 in May.
"The dollar has been closely moving in correlation with U.S. yields and today will be no exception, with the bond market's reaction to the jobs report likely determining the direction of currencies," said Yukio Ishizuki, senior currency strategist at Daiwa Securities.
"The bond market rally may have gone too far so its reaction to the jobs data could be volatile."
The dollar was flat at 107.850 yen . The greenback was little changed on the week, during which it briefly touched a two-week high of 108.535 when a U.S.-China trade truce boosted risk appetite and weighed on the safe-haven yen.
The euro was steady at $1.1284 (EUR=) and headed for a weekly loss of 0.75%. A drop in European government bond (EGB) yields to record lows this week, in sympathy with the global debt rally, has weighed on the single currency.
Germany's benchmark 10-year government bond yield (DE10YT=RR) matched the European Central Bank's deposit rate of minus 0.4% for the first time on Thursday, in the latest sign that markets are braced for interest rate cuts soon.
"The bull flattening of the EGB yield curve needs to be viewed with caution as it is not driven by weaker equities and economic concerns, but rather by speculation," said Makoto Noji, chief currency and foreign bond strategist at SMBC Nikko Securities.
The bond market curve is said to "bull flatten" when the decline in yields of longer-dated paper outstrips the fall in shorter-dated rates - an occurrence usually seen as presaging economic stress.
The Australian dollar was flat at $0.7026 after climbing to a two-month high of $0.7048 the previous day.
The Aussie has advanced 1.4% this week with expected rate cuts from the Fed and the ECB helping shift some of the focus away from the Reserve Bank of Australia's own easing bias.
The pound struggled near a two-week low of $1.2557 plumbed on Wednesday.
As expectations for monetary easing from the world's central banks have steadily increased, investors believe the Bank of England might have to , which until recently had signaled its next move would be to tighten, will not be able to resist the pressure to ease.