FOREX-Dollar back in form as payrolls hangover lifts

* Shakeout complete, dollar index back at pre-payrolls highs

* Data restoring faith in U.S. recovery, CPI next in focus

* Aussie eyes local employment data

By Ian Chua

SYDNEY, Jan 16 (Reuters) - The U.S. dollar traded at a near one-week high against a basket of major currencies early on Thursday, having returned to levels seen before last week's soft payrolls data as faith in the U.S. economic recovery was restored.

Upbeat numbers this week held out hope that Friday's surprisingly soft jobs report was an anomaly and did not signal the economy had lost steam at the end of last year.

U.S. data on Wednesday showed producer prices recorded their largest gain in six months in December, yet there were few signs of any sustained price pressures. The figures came a day after U.S. retail sales rose and a core spending gauge posted a big jump. News Search ID:nL2N0KP0PE

Investors were encouraged to go long on the greenback, again betting the Federal Reserve can continue to unwind its massive bond-buying stimulus over 2014. They pushed the dollar index

.DXY back to the highs seen last Friday.

Against the yen, the dollar bounced to 104.56 JPY= , within striking distance of a five-year peak of 105.45 yen scaled at the start of the year.

Also helping, one of the Federal Reserve's most outspoken doves, Chicago Fed President Charles Evans, said he backed a continued wind-down of the Fed's bond-buying program and could even see bigger cuts to the program if the economy strengthens.

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Traders said U.S. consumer inflation data due later on Thursday will be closely watched. ECONUS

"A strong inflation print may encourage the Federal Open Market Committee to take a more aggressive approach in normalizing monetary policy as the central bank sees a more robust recovery in 2014," said David Song, analyst at DailyFX.

"With that said, a positive CPI print may spark a bullish reaction in the USD, but the dollar may face a larger decline over the near-term should the data print fall short of market expectations."

The euro skidded to $1.3605 EUR= , having touched a near one-week trough of $1.3581 overnight, while the Australian dollar briefly dipped below 89 U.S. cents AUD=D4 , well off Monday's peak of $0.9087.

The outcome of Australia's employment data due at 0030 GMT could very well decide whether the Aussie makes another stab at a three-year trough of $0.8820 plumbed last month.

Analysts polled by Reuters expect the economy created 7,500 jobs in December, leaving the unemployment rate steady at 5.8 percent. ECONAU

Any disappointment in the jobs data will no doubt fuel chatter of the need for another interest rate cut by the Reserve Bank of Australia, possibly putting the Aussie on the same trajectory as the Canadian dollar.

Speculation the Bank of Canada could turn more dovish following a string of weak domestic data has knocked the Canadian dollar to four-year lows. It fell as far as C$1.0992 per dollar overnight and was last at C$1.0941.

(Editing by Leslie Adler)

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

Keywords: MARKETS FOREX/