The dollar hit a two-month high versus the yen on Wednesday, extending gains kicked off by data the previous session that showed US manufacturing expanding at its fastest pace in almost a year. The euro retreated from recent record highs versus the yen, the Swiss franc and dollar as a build-up of long positions in the currency made investors reluctant to continue buying.
A pick-up in the Institute for Supply Management's manufacturing index reported on Tuesday calmed some concerns about the extent of US economic slowdown. Ahead of the key US jobs report on Friday, the dollar pushed above 120.00 yen for the first time in two months.
"The dollar got a bit of a lift after the surprisingly strong ISM report yesterday. We treat this as mainly a technical correction after a very strong rise in euro/dollar," said Teis Knuthsen, head of FX research at Danske in Copenhagen.
Volumes remained thin after holidays in Europe and Asia earlier in the week and with Japan's markets due to be shut on Thursday and Friday. By 1127 GMT, the euro was down 0.25 percent at $1.3571, having pulled back from last week's record high above $1.3680.
The dollar stood at 120.20 yen, up 0.4 percent on the day, just off an earlier two month high of 120.28 yen. The euro was broadly steady against the Japanese currency at 163.16 yen. The euro rose above 163.30 yen the previous day, the highest since its 1999 launch.
The dollar's broad recovery knocked its Australian and New Zealand counterparts as investors locked in profits from recent rallies to 17-year highs in the Aussie and 22-year peaks in the Kiwi versus the greenback.
Data on Wednesday showed the eurozone Purchasing Managers' Index held at 55.4 in April, matching March's 13-month low and slightly below a consensus forecast of 55.7 but still holding firmly in the growth territory above 50. Data also showed that unemployment in the eurozone fell to 7.2 percent in April, the lowest ever since the series of records began in 1993.
Markets showed little reaction and analysts said the data should not alter expectations for a European Central Bank interest rate hike next month and the possibility of further tightening later in the year. ECB Governing Council member Klaus Liebscher wrote in an Austrian newspaper on Wednesday that Europe seemed strong enough to weather a moderate slowdown in the United States.
In the United States, the ADP private sector employment report at 1215 GMT could give markets a steer on the likely outcome for official non-farm payrolls data on Friday.
"All the numbers will be scrutinised with respect to their relevance to the labour market report: today the ADP report, tomorrow the employment component of the ISM service index -- but really the key data is on Friday and until then I would be surprised if investors take a very firm view," said Michael Klawitter, FX strategist at Dresdner Kleinwort in Frankfurt. The ADP report is expected to show that 100,000 jobs were added in April compared to 106,000 in March. In non-farm payrolls, the consensus is also for a 100,000 rise after 180,000 the previous month.