July 3 Wednesday 10:55 GMT
* Dollar index edges up to fresh 5-week high
* Lower volume on US holiday could lead to volatility
* Expectations of Fed's reduction of stimulus support dollar
By Lisa Twaronite
TOKYO, July 3 (Reuters) - The Australian dollar's tentative recovery unraveled on Wednesday as it skidded to fresh 3-year lows after the head of the country's central bank said it stands ready to support an economy shifting to a new source of growth as its long-run mining investment boom cools.
The U.S. dollar held firm against its major counterparts, with the dollar index touching its highest level since late May, as investors positioned for a U.S. holiday and key jobs data that could heighten expectations that the Federal Reserve will begin to reduce its monetary stimulus in the coming months.
Speaking just a day after the Reserve Bank of Australia (RBA) left its cash rate unchanged at a record low 2.75 percent, Governor Glenn Stevens said he was surprised by the resilience of the Australian dollar, but noted that free-floating exchange rates "do eventually adjust."
Stevens' comments sent the Aussie plunging as low as $0.9081 , from a session high of $0.9189. It was last down 0.6 percent at $0.9087.
"The RBA always says the Australian dollar is still high. It's true, I think," said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.
"Probably the $0.9000 level is not so strange, considering Australian fundamentals of weaker investment in natural resource industries, weak retail sales, weak Chinese growth. It's very hard to find good points to boost the Aussie dollar right now," Murata said.
Growth in China's services sector sagged to its weakest pace in nine months in June, according to data released on Wednesday.
The Aussie has come under heavy selling pressure in recent weeks as the U.S. dollar rose broadly on expectations the Fed would soon start to unwind its stimulus, and on slowing growth in China, Australia's major export market. The RBA's dovish comments amplified the currency's fall from levels of over $1.00 as recently as May 14.
U.S. financial markets will shut early on Wednesday and remain closed on Thursday in observance of the U.S. Independence Day holiday. Lower volume could lead to greater volatility, particularly ahead of Friday's release of the monthly jobs report for June.
Economists polled by Reuters expect payroll additions of 165,000 last month and a lower unemployment rate of 7.5 percent.
The Fed has signaled its intent to begin to consider trimming its bond-buying stimulus as the U.S. economy improves. Such expectations have pushed up U.S. Treasury yields, which in turn have lifted the greenback.
A better-than-expected figure would likely push up both U.S. yields and the dollar. A disappointing figure would suggest the central bank will maintain its asset purchases for now, though some strategists and market participants believe it would not alter the overall trend toward a stronger dollar.
"Most believe that the Fed is mostly likely to taper at some point in 2013, so it's kind of like 'heads I win, tails you lose,'" said Andrew Wilkinson, chief economic strategist at Miller Tabak in New York.
"You buy the dollar on expectations of strong data, and even if it's softer, there shouldn't be a resumption of strength in the yen," he said, with the Bank of Japan committed to maintaining its dramatic monetary easing to aim for its target of two percent inflation in two years.
Data on Tuesday backed stimulus-tapering expectations, as U.S. new motor vehicle sales in June were on track for their strongest month in more than 5-1/2 years, while factories posted a second straight month of gains in new orders in May. Home prices also posted their biggest annual increase in more than seven years.
The dollar index added 0.1 percent to 83.616 after earlier rising as high as 83.635, its highest since May 30.
The dollar climbed slightly from late U.S. trade to 100.65 yen after advancing to 100.86 yen early in the session, its loftiest level since May 31. On that day, it rose as high as 101.27 yen, with the 101-yen level now seen as a key resistance point and stop-loss orders said to lie around it.
The euro slipped about 0.1 percent to $1.2964. The European Central Bank is likely to emphasise at its monthly meeting on Thursday that the euro zone economy still needs help.
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