The dollar touched a three-month peak against the yen on Thursday after a strong report on regional US business activity, but it failed to sustain gains before key US jobs data due on Friday. The manufacturing report also included the highest reading of an index of prices paid by factory managers since August 2006, reinforcing the view the Federal Reserve may keep rates steady this year.
This offset revised data released earlier in the day showing weaker US growth in the first quarter. "We had a soft reading on GDP, but a strong regional report that even highlighted some of the Fed's worries about prices and inflation," said Jason Schenker, an economist at Wachovia Corp in Charlotte, North Carolina. The foreign exchange market "now is bracing for a slew of data on Friday. The jobs report will be on top of traders' lists."
Against the yen, the dollar climbed as high as 121.99 yen, the highest since mid-February, according to electronic trading platform EBS. It later gave up almost all its gains and traded at 121.72. The euro was up 0.2 percent at $1.3457, remaining within well-worn ranges for the last month. Earlier in the trading session, the government revised down its estimate for first-quarter growth, showing the US economy grew at its slowest pace in more than four years.
Analysts have widely discounted a soft economic growth reading and the lower-than-expected result failed to have a sustained impact on the market. The dollar has clawed its way back from a record low hit against the euro in April and a 26-year low against the pound as worries about the US economy's health have eased, reducing speculation of lower interest rates that would erode the greenback's yield appeal.
After the data releases, the implied chances of a rate cut this year were down to about 30 percent from about 40 percent late on Wednesday, according to Reuters data. Markets still expect the Fed to hold rates steady at its next monetary policy meetings in June and August.
For the May US non-farm payrolls report on Friday, economists forecast an increase of 130,000 jobs. A derivatives auction on Thursday showed traders betting on a 121,200 jobs gain. Other economic indicators slated for Friday include readings on personal consumer expenditures and on consumer confidence. Jitters before the jobs data and month-end "fixes" - cut-off rates for currencies given at the end of the London trading session - also helped push the dollar lower against sterling, traders said.
In late afternoon, sterling traded at $1.9802. Against the Canadian dollar, the greenback fell to a 29-1/2-year low at C$1.0666 on data showing that Canada's economic growth outpaced that of the United States in the first quarter. After three quarters of sub-trend growth, Canada's real gross domestic product growth bounced back to 3.7 percent from the previous quarter.