* U.S. Treasury yields reaction to economic data eyed

By Kaori Kaneko

TOKYO, Jan 4 (Reuters) - The dollar edged down from a four-month high against the yen but held firm against other majors on Monday, the first trading day of 2010, as investors focus on U.S. data this week that could add to optimism about the economy.

Investors are set to take cues from the U.S. December employment report on Friday as well as figures from the manufacturing and service sectors. ECONUS

The main focus for market players is the direction of the dollar now that year-end buying is no longer around to give the greenback support, said Minoru Shioiri, chief manager of FX trading at Mitsubishi UFJ Securities.

And the reaction of U.S. yields to the upcoming data will be key for dollar/yen, he said.

Higher longer-dated U.S. Treasury yields underpinned the dollar's recent gains against the yen, traders said, with benchmark Treasury yields rising above 3.9 percent on Thursday, in sight of last year's high around 4 percent. [US/] US10YT=RR

The dollar was trading around 92.90 yen, having risen as high as 93.15 yen on trading platform EBS last Thursday, its highest since early September 2009.

Although the U.S. currency maintained its firm tone, its upside against the yen was capped by Japanese exporters' selling, traders said.

The dollar index, a gauge of the greenback's performance against six other major currencies, inched up 0.3 percent to 78.060. .DXY

The euro was trading around $1.4285, down 0.3 percent from U.S. trading on Dec. 31.

Yen crosses were lower with the euro slipping 0.5 percent to 132.53 yen EURJPY=R and the Australian dollar falling 0.5 percent to 83.10 yen. AUDJPY=R

The U.S. non-farm payrolls report is expected to show U.S. employers cut 20,000 jobs in December, according to economists polled by Reuters, after the economy shed a much lower-than-expected 11,000 jobs in November. [ECI/US]

Data released last week showed the number of U.S. workers filing new applications for jobless benefits unexpectedly fell in the week ending Dec. 26 to the lowest level in about 17 months. [ID:nN31170026]

The data helped the dollar to rise against the yen to its highest since early September as it affirmed optimism about the U.S. economy.

An improvement in Friday's jobs data could lift the greenback in the short-term, but it is still open to question whether the dollar will keep its upward momentum, traders said.

The dollar seems to have a little more room to rise as an initial reaction to positive economic figures, said a trader at a Japanese bank.

But we probably need to wait before making conclusions on the dollar's direction, we should not decide after a single set of monthly jobs data, he said.

Before the key jobs report on Friday, investors will also scrutinize the Institute for Supply Management December manufacturing index later on Monday, which is expected to show a reading of 54.0 versus 53.6 in November. Also a private-sector jobs report and weekly jobless claims are slated for this week.

The minutes from the Federal Reserve's December monetary policy meeting are also scheduled to be released on Wednesday. (Reporting by Kaori Kaneko; Editing by Joseph Radford)

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