* U.S. dollar rally against euro pauses before payrolls
* Dollar pares gains against yen on Powell report
* Yen seen likely to weaken further on technicals (Adds Powell, updates prices)
NEW YORK, Oct 3 (Reuters) - The dollar weakened slightly against the euro on Tuesday as investors squared positions after a three week greenback rally, and before three days of heavy data culminating in Friday's U.S. employment report for September.
Stronger U.S. data along with the prospect of U.S. tax cuts and the likelihood of an interest rate increase in December have boosted the U.S. currency in recent weeks.
"We have seen three consecutive weeks of rallies in the broader dollar index so I do think that markets are squaring up a little bit ahead of a pretty heavy data calendar," said Mark McCormick, North American head of FX strategy at TD Securities in Toronto.
The euro was last up 0.09 percent against the dollar at $1.1740.
The euro was partly supported by large option expiries on Tuesday that put a floor under the single currency. About $4 billion worth of currency options were expiring between the 1.1750 to 1.18 levels on Tuesday.
Traders and investors were also looking to add bets on possible divergence between the monetary policy outlooks in the United States and Europe, with expectations growing that the European Central Bank will adopt a more cautious stance.
"I don't think the market is pricing how cautious they are likely to continue to be and that will be reiterated by (European Central Bank chief) Mario Draghi on Wednesday," said Martin Arnold, a macro-strategist at ETF Securities in London.
The dollar gave back some earlier gains against the yen after Politico reported that Treasury Secretary Steven Mnuchin favors Fed Governor Jerome Powell to replace Janet Yellen as Fed chair.
Former Fed Governor Kevin Warsh, who has exhibited more hawkish views than Yellen, has been seen as the favorite to win the position in recent days.
Technical analysts say the greenback is likely to continue to strengthen against the Japanese currency, after eroding its downtrend that had been in against place since January this year.
Commerzbank analyst Karen Jones said in a report on Tuesday that the dollar is now likely to strengthen to around 114.38 to 115.04 yen, from 112.89 yen currently. (Additional reporting by Saikat Chatterjee and Fanny Potkin in London; Editing by Steve Orlofsky)