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U.S. dollar gains after stronger-than-expected services sector data

The U.S. dollar rose on Wednesday after data showed the services sector in the world’s largest economy rebounded in May after a contraction the month before, highlighting uncertainty surrounding the expected start of the Federal Reserve’s easing cycle later this year.

The Institute for Supply Management said its nonmanufacturing purchasing managers index rose to 53.8 last month from 49.4 in April. May’s reading, the highest since August, overshot estimates of all 59 economists in a Reuters poll that had pegged the median expectation at 50.8.

“The economy is not falling off a cliff the way it looks like from the April data,” said Marc Chandler, chief market strategist at Bannockburn Forex in New York. “The April numbers have exaggerated how weak the economy is.”

In mid-morning trading, the dollar index was up 0.2% at 104.28. It hit 103.99 on Tuesday, its lowest since April 9.

The euro, the biggest component of the dollar index, inched lower after the ISM data, trading down 0.1% at $1.0873.

Investors are now looking to the ECB meeting on Thursday, in which the bank is widely expected to lower its deposit rate from a record high of 4%.

Earlier in the session, the Bank of Canada (BOC) cut interest rates by 25 basis points (bps) to 4.75%, its first cut in four years. The bank said more easing was likely if inflation continued to ease. The U.S. dollar rose 0.4% to C$1.3729.

Analysts expect the Bank of England to emulate the ECB’s and BOC’s moves when the British central bank convenes in two weeks to decide on interest rates.

The Swiss National Bank, meanwhile, already started easing in March, and could ease again this month after Swiss inflation held steady in May.

Earlier in the session, data showed U.S. private payrolls increased less than expected in May while data for the prior month was revised lower, a report showed on Wednesday.

Private payrolls increased by 152,000 jobs last month after rising by a downwardly revised 188,000 in April, the ADP Employment report showed. Economists polled by Reuters had forecast private employment increasing by 175,000 last month.

The dollar showed little reaction to the ADP report.

Aside from the ECB policy meeting, investors are also looking to Friday’s nonfarm payrolls report, with the market expecting 185,000 new jobs created last month, according to a Reuters poll.

“The jobs data should still point to a fairly robust labor market,” said Bannockburn’s Chandler. “Despite theJOLTS (Job Openings and Labor Turnover Survey) data, I don’t think this passes the threshold for a significant slowing in the labor market, which is not going to affect rate expectations.”

The dollar surged 0.9% against the yen to 156.33 yen. The Japanese currency retraced more than Tuesday’s gains that were driven by investors unwinding bets in emerging markets.

Japanese real wages fell for a 25th straight month in April as inflation outpaces nominal pay rises.

On Tuesday, Bank of Japan Deputy Governor Ryozo Himino said the central bank must be “very vigilant” to the impact the currency’s weakness could have on the economy and inflation.

Investors see the BOJ tightening its policy in the future, though not enough to strengthen the yen.

Emerging markets stabilised after a turbulent few days.

The Mexican peso gained against the U.S. dollar, which fell 1.5% to 17.580 pesos. The ruling left-wing Morena party was re-elected and, in coalition, within reach of two-thirds majorities in both Congress chambers.

Some analysts said expectations for greater government control over the economy weighed on the Mexican currency.

India’s rupee recovered from a seven-week low against the dollar. Election results in India showed voters had returned Narendra Modi to power by a much slimmer margin than expected. The dollar was last down 0.2% versus the rupee at 83.372.

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