FOREX-Dollar back in favour as CAD comes under fire

* Upbeat U.S. trade data helps turn dollar around

* Dollar index hits one-month high, reverses losses

* Canadian dollar sold off on renewed worries about economy

By Ian Chua

SYDNEY, Jan 8 (Reuters) - The dollar hovered near a one-month high against a basket of major currencies early in Asia on Wednesday, having rebounded smartly overnight on the back of upbeat U.S. trade data.

The dollar index .DXY rose as far as 80.946, reaching highs seen in early December after the United States posted its smallest trade deficit in four years as exports hit a record high. It last stood at 80.875. News Search ID:nLNS7CEAC2

In contrast, investors dumped the Canadian dollar on news that activity by purchasing managers nosedived unexpectedly in December, while the country's trade deficit was far larger than forecast.

That saw the greenback jump more than 1 percent to C$1.0782

CAD=D4 , the highest since mid-2010, making the currency pair a standout mover overnight.

The dollar also strengthened against the euro, which slipped to $1.3613 EUR= from a high of $1.3657. On the yen, the greenback rose to 104.69 JPY= , pulling further away from two-week lows of 103.91 set on Monday.

The common currency firmed against the yen as well, drifting up to 142.45 EURJPY=R from a three-week trough of 141.50 plumbed on Monday.

Demand for the safe-haven yen eased off after Wall Street scored its first positive session for 2014 with the S&P 500 index .SPX ending 0.6 percent higher. News Search ID:nL2N0KH232

David Rodriguez, strategist at DailyFX, noted the strong positive correlation between dollar/yen and the S&P 500 index.

"And though stocks remain near all-time highs, these strengthening links suggest that the first sign of danger could spark a stampede from popular currency and equity market trades alike," he warned.

"If we see sharply negative reactions to the highly anticipated ECB rate decision or U.S. non-farm payrolls report, we could see the S&P 500 pull back sharply and the yen trade significantly higher."

The European Central Bank meets on Thursday for the first time in 2014, but is likely to do no more than warn of its readiness to act in the future despite yet another surprise fall in euro zone inflation. News Search ID:nL6N0KG1ZX

Data on Tuesday showed annual euro zone inflation dipped to 0.8 percent in December from 0.9 percent in November, while the core reading hit a record low of 0.7 percent, staying well under the ECB's target of just below 2 percent.

Markets are also keenly awaiting U.S. jobs data on Friday. Analysts polled by Reuters expect the world's biggest economy to have created 196,000 jobs in December. ECONUS

Any unexpected strength could fuel market speculation that the Federal Reserve might speed up its plan to scale back its bond-buying stimulus, a positive for the U.S. dollar.

Fed officials, though, have been at pains to play down such thoughts. Boston Fed President Eric Rosengren and San Francisco Fed President John Williams said on Tuesday they expected the U.S. central bank to reduce stimulus at a steady pace.

News Search ID:nL2N0KH1N8

The firmer greenback briefly knocked the Australian dollar below 89 U.S. cents, although good buying interest there helped lift it back to $0.8916 .

The Aussie dropped more than 14 percent against the U.S. dollar last year, partly due to persistent jaw boning by Australia's central bank, which has made clear it wanted a weaker currency to drive the economy. It has already cut interest rates to a record low 2.5 percent.

(Editing by Andre Grenon)

((ian.chua@thomsonreuters.com)(+61 2 9373 1871)(RM: ian.chua.thomsonreuters.com@reuters.net))

Keywords: MARKETS FOREX/