FOREX-U.S. jobs data next test for dollar as euro struggles

* Dollar index hovers at 11-year high, jobs data next test

* Euro still struggling even as ECB goes negative on yields

* ECB starts bond buying next week, lifts economic outlook

By Ian Chua

SYDNEY, March 6 (Reuters) – The dollar hovered at 11-year highs against a basket of major currencies early on Friday and could extend gains if non-farm payrolls due later in the day support the case for a rise in U.S. interest rates in coming months.

Analysts polled by Reuters expect U.S. payrolls to have increased 240,000 last month and the jobless rate to have ticked down to 5.6 percent from 5.7 percent.

Such an outcome could “spur a further decline in EUR/USD as it fuels bets for a mid-2015 Fed rate hike,” said David Song, a currency analyst at DailyFX.

The dollar index traded at 96.335, having climbed as far as 96.593 – a high not seen since September 2003. Much of the move was due to persistent weakness in the euro, which stayed under pressure after the European Central Bank said it would kick off its 1 trillion euro bond-buying program next week.

ECB President Mario Draghi surprised some by saying the central bank would be prepared to buy bonds with negative yields of up to 20 basis points, triggering a big rally in euro zone bonds.

The yields news overshadowed upgrades to the ECB’s forecasts for economic growth.

“Our expectation is that the initiation of the bond purchases will help weaken the euro over the next few weeks, predominantly through the interest rate channel,” analysts at CitiFX wrote in a note to clients.

The euro broke below $ 1.1000 for the first time since September 2003, but has since drifted back to $ 1.1030. Traders said the currency was vulnerable to a test of $ 1.0500, a trough seen in March 2003.

Against sterling, the common currency hovered just above a seven-year low of 72.18 pence. It also struggled at 132.50 yen, near its lowest in a month.

Commodity currencies fared badly, led by a steep fall in the New Zealand dollar. The kiwi started to wilt in Asia on Thursday and accelerated its decline overnight as stop-loss selling was triggered.

Traders noted the kiwi’s underperformance began after New Zealand’s central bank said it was considering forcing banks to hold more capital to back loans to residential property investors.

Such measures could lessen the need for a hike in interest rates and investors duly responded by kicking the kiwi to a 1-1/2-week low of $ 0.7486, well off this week’s peak of $ 0.7611.

Traders said profit taking was also likely at play, particularly against the euro and the Australian dollar, which hit record lows on the kiwi earlier in the week.

(Editing by Leslie Adler)