FOREX-Dollar adds to gains vs yen after stellar U.S. jobs data

(Corrects 9th paragraph to read "four-month low")

By Patrick Graham

LONDON, Aug 8 (Reuters) - The dollar built on gains following Friday's bumper U.S (Other OTC: UBGXF - news) . jobs numbers on Monday, gaining more than half a percent against the yen ahead of a week of data likely to feed the debate on the chances of a rise in U.S. interest rates this year.

Dealers cited an interview with Federal Reserve policymaker Jerome Powell in the Financial Times, conducted before Friday's data, as quelling any speculation the Fed could raise rates as soon as September, seen in any case as only a 15 percent chance. .

But the jobs numbers on Friday were strong enough to push expectations for a rise in December to closer to 40 percent, and data this week, in particular retail sales numbers on Friday, will fuel that discussion.

Market indications of volatility, however, have dropped back sharply in the past week to close to their lowest this year, suggesting trading has moved firmly into a summer lull.

"The dollar took a big boost from the jobs numbers on Friday and there is a part of the market that expect that to follow through into retail sales on Friday," said Citi strategist Richard Cochinos.

"But really it's August trading at the moment and we're struggling to find clear drivers."

In early trade in Europe, the dollar was up 0.1 percent against the basket of currencies used to measure its broader strength. It firmed 0.6 percent to 102.34 yen and was flat at $1.1088 per euro, having gained to $1.1046 on Friday, its strongest in more than a week.

U.S. nonfarm payrolls rose by 255,000 jobs in July, way above economists' median forecast of an increase of 180,000 while payroll growth in June was also revised up to 292,000, with hiring broadly based across the sectors of the economy.

But in broader terms, the dollar is still recovering from a four-month low hit late last month on the back of reduced expectations for any move by the Fed this year.

With (Other OTC: WWTH - news) other central banks in easing mode -- the Bank of England unveiled a package of measures last week -- investors think uncertainty around the Chinese economy and Britain's prospective departure from the European Union will help keep the Fed cautious.

Powell was the latest Fed policymaker to point to the prospect of the longer-run neutral rate of interest rates -- called "r-star" in some Fed analysis -- in general being lower than in the past.

"Central banks remain one of the key drivers of foreign exchange, as (the) easing by the Bank of England demonstrated," Goldman Sachs (NYSE: GS-PB - news) said in a note to clients, pointing to the risk of a weaker dollar in the short-term.

"The narrative around r-star has built and weighed on the dollar, even as the labor market has made strong gains."

Another big easing set-piece this week is the Reserve Bank of New Zealand's policy meeting, widely expected to cut interest rates there to 2 percent. Dealers say that move is already firmly priced into the New Zealand dollar, 0.2 percent lower on Monday at $0.7123.

"A 25 basis point cut is completely discounted, with an additional 35 basis points priced into the curve after that," RBC Capital Markets strategist Sue Trinh said in a note to clients.

"While our NZ economists' baseline scenario is that this is the final cut of this cycle, risks are skewed to further easing. The set of forecasts provided in the full quarterly Monetary Policy Statement will be important in refining their view." (Editing by Keith Weir)