The dollar fell against the euro on Wednesday as investors took profits ahead of Friday's April US employment report, an important gauge of economic growth that could indicate when interest rates will rise.
Although futures markets expect the Federal Reserve to raise interest rates for the first time in four years by September, the "measured" approach it announced on Tuesday toward removing accommodative monetary policy sounded less aggressive than some had expected.
This left markets bracing for the non-farm payrolls report as the biggest event on the horizon affecting the interest rate outlook.
Hopes for higher rates had acted as a key support for the dollar during its rally of nearly 12 cents against the euro from February to April, until that rally began to falter in the past few sessions.
"For the time being we are going to see the dollar under some pressure, maybe up to $1.25 on the euro. The only caveat is the employment number on Friday," said David Schoenthal, senior managing director at Bear, Stearns & Co in New York.
"If they (payrolls) come in really strong, then it might change the Fed's view of things. Maybe they are going to react faster. That would be good for the dollar," Schoenthal said.
The dollar recouped some of its losses in midmorning New York trade after a US service sector activity index showed a stronger-than-expected reading.
But the currency softened as the market turned its focus to Friday's jobs report.
Late afternoon in New York, the euro was up about 0.6 percent against the dollar at $1.2168, according to Reuters data, just below a four-week high of $1.2179 reached earlier in the global day.
The Institute for Supply Management non-manufacturing index rose to 68.4 in April from 65.8 in March, compared with economists' expectations for a 64.0 reading.
One reason for the dollar's lacklustre reaction to the report was that the greenback has already priced in so much robust US economic data, Franulovich said. At the same time, he noted that the wide US current account deficit may also be weighing on the currency again.
On Thursday, traders will pay some attention to US jobless claims, with economists forecasting 335,000 for the latest week, and first quarter productivity, with a 3.5 percent rise forecast.
Another strong jobs growth number, after a surprisingly big rise in March, would be expected to reinforce the case for an early tightening by the Fed, a move that would make holding US assets more attractive and lift the currency.
A surprisingly weak US jobs report, on the other hand, would likely restrain rate hike expectations and hurt the dollar.
The dollar traded down about 0.7 percent against the Japanese currency to 108.62 yen. Japan was closed on the final day of its Golden Week holidays, which kept Asian trading light.
The greenback also traded down 0.5 percent against the Swiss franc at 1.2742 francs after falling as low as 1.2694 francs, its lowest since early April.
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