The dollar rose across the board on Wednesday after a report showed the US private sector created more jobs than expected last month, leading some to conclude the broader labour market remained resilient.
That, along with Tuesday's surprisingly strong US service sector report, helped cap nearly two weeks of sharp euro gains that took the currency to a 20-month peak versus the dollar.
But traders said market sentiment toward the dollar remained broadly negative, with investors reluctant to take on bigger bets ahead of Thursday's European Central Bank meeting where officials are expected to lift interest rates and address recent currency movements.
"The reports (on the US economy) were somewhat positive and gave a bit of a boost to the dollar, but people will wait for the ECB meeting, a much bigger event," said Greg Salvaggio, vice president for currency trading at Tempus Consulting in Washington. Late in New York, the euro was down about 0.3 percent at $1.3285, while the dollar traded up about 0.35 percent at 115.22 yen, just below its session peak.
The ECB is widely expected to lift rates to 3.5 percent on Thursday, but markets will be watching to see whether it signals intentions to carry on with more tightening in 2007.
David Mozina, head of Lehman Brothers foreign exchange strategy in New York, said the meeting is also important because "(ECB President Jean-Claude) Trichet might be drawn into talking about the currency. "And he may say that the strength in the currency may be doing some of the dirty work of interest rates," Mozina added.
So far, most eurozone policymakers have said euro moves above $1.30 are no cause for concern, though French officials have worried about a strong euro's impact on exports.
The Bank of England will also meet on Thursday, and while it's expected to leave rates unchanged, a focus on inflation risks could signal future hikes and help sterling reverse losses suffered Wednesday on soft UK industrial production data. The New Zealand dollar jumped to $0.6860 on Wednesday after the country's central bank kept rates steady but said it could not rule out further tightening.
But the Canadian dollar shed 0.6 percent against its US counterpart after the Bank of Canada kept rates at 4.25 percent. The Reserve Bank of Australia also kept rates steady, while Bank of Japan Policy Board member Kiyohiko Nishimura said on Wednesday the Bank of Japan could raise interest rates even if its views on monetary policy do not completely match those of financial markets.
Japanese rates are expected to rise 25 basis points to 0.5 percent by the end of the first quarter next year. Demand for the greenback has declined in the past week as traders bet that the Federal Reserve's next move will be to cut interest rates while the ECB, BoE and others push them higher.
That's not likely to change much even after this week's robust readings on US private and service sector jobs growth, said Dixon Fung, currency trader at MG Financial in New York.
"The market is still bearish on the dollar, because even on profit-taking, the euro is holding up pretty well," he said, adding that even dovish comments from Trichet on Thursday "won't get us back to a 1.20 handle on euro-dollar."