FOREX-Dollar rises vs yen as Fed, BOJ paths diverge
* Dollar close to six-month high vs yen
* Investors look to U.S. GDP, jobs data after strong ISM
* Euro hits five-year high vs yen
LONDON, Dec 3 (Reuters) - The yen fell against the dollar on Tuesday as strong U.S. data the previous day raised expectations the Federal Reserve could soon scale back its bond-buying while Japanese monetary policy looks set to stay loose for some time.
The dollar rose 0.1 percent to 103.04 yen. It hit 103.38 yen in Asian trading, not far from a six-month high of 103.74 yen, a level dollar bulls are targeting. If it breaks that level, the dollar will be at its highest in four years.
The yen's broad weakness saw the euro hit a new five-year high of 140.03 yen.
Trading volumes of dollar/yen were almost double the average over the past month, according to data from the Reuters dealing platform.
Yields on 10-year U.S. Treasuries rose on Monday, closing in on a two-month high after the ISM gauge of U.S. factory activity hit a 2-1/2 year high in November.
The data potentially brought the Fed a step closer to scaling back its huge bond-buying stimulus programme - a move that would support the dollar.
The two-year yield differential of Treasury notes over Japanese government bonds widened to its highest in more than two weeks.
"A much stronger than expected ISM survey yesterday keeps alive the chance of Fed tapering on December 18," said ING analyst Tom Levinson.
Peter Kinsella, currency strategist at Commerzbank, said tapering was likely in the first quarter of next year, but added that the dollar was nevertheless finding strength before U.S. GDP and non-farm payrolls data later this week.
"(ISM numbers) were very, very good," he said. "You're seeing markets start to run ahead of these (GDP and non-farm payrolls) numbers. You could see (dollar/yen at) 104, 105 at a stretch (by the end of the year)."
The yen has been under pressure for weeks on the view that the BOJ's commitment to easy policy makes it the best funding currency for investments in higher-yielding assets - so called carry trades.
Data from a U.S. financial watchdog published on Monday showed speculators have already substantially sold the yen. Their net yen short positions stood at 123,202 contracts last week, the highest level since July 2007, while their positions on other major currencies were more balanced.
Given the huge short positions, some analysts suspect more evidence the global economy is heading for a solid recovery may be needed to entice more yen-carry trades and weaken the yen.
The euro rose 0.2 percent to $1.3567 on investor confidence the European Central Bank would keep interest rates on hold this week after above-forecast inflation data last Friday.
The Australian dollar was up 0.1 percent at $0.9112 after data showed solid net exports in July-September as well as firm retail sales in October.
Earlier, the Reserve Bank of Australia reiterated after a policy meeting that the Aussie was still uncomfortably high.