The dollar slumped on Wednesday, reversing sharp gains against the euro and yen earlier this week, as steep job losses in the private sector rekindled fears of a prolonged U.S. recession. The report, compiled by ADP Employer Services, showed a 693,000 decline in U.S. private sector employment for December, which could well prompt some analysts to lower their already weak forecasts for the month. A Reuters poll shows U.S. non-farm jobs are expected to drop by 500,000 in December. The dollar pushed back from nearly one-month highs against the euro and five-week peaks versus the yen, with investors also locking in gains, including central bank buying of euros at lower levels for reserve-management purposes and interest from funds. "The ADP report reinforces the view that things could get worse than expected and we're already expecting a long period of weakness," said Meg Browne, a currency strategist, at Brown Brothers Harriman in New York. "That has caused downward pressure on the dollar." In midday New York trading, the euro surged to $1.3677 , up 1.3 percent on the day, recovering from near one-month lows on Tuesday, according to Reuters data. The euro, however, remained vulnerable as euro zone data showed a rapidly weakening economy and easing inflation there, which raised prospects for the European Central Bank to cut rates again next week. Against the yen , the dollar fell 1 percent to 92.65, after hitting five-week highs the previous day. The ICE Futures's dollar index, a gauge of the greenback's value against a basket of six major currencies, fell 1.1 percent to 81.880 .DXY. Joel Prakken, chairman of Macroeconomic Advisers, said on Wednesday the ADP report suggested that the government's more comprehensive non-farm payrolls data could show a loss of about 670,000 jobs. Macroeconomic Advisers jointly crunches the private sector jobs number with ADP. Some banks have already revised their forecast for Friday's employment report. Wells Fargo, in a note, said it now expects job losses of at least 600,000, while High Frequency Economics, a research firm in Valhalla, New York, believes employment could decline by 700,000. Still, analysts said the impact on the dollar of a potentially dismal number for Friday's jobs data could be muted. Alan Ruskin, chief international strategist, at RBS Global Banking and Markets, said recent revisions of the ADP data have become a more reliable barometer of the upcoming non-farm payrolls report. "This number should then preempt much of the potential dollar-negative, bond-positive, equity/risk negative response that could have occurred on weak non-farm payrolls data this Friday." Ruskin, whose firm is based in Greenwich, Connecticut, thinks it will will probably "take dire real economy data to shock a market that has become numb and learned to expect the worst." Earlier in the session, data showed euro zone producer prices fell sharply in November, logging a record monthly decline on a sharp drop in energy costs. [ID:nL7430653] That came on the heels of data the previous day showing a smaller-than-expected rise in consumer prices, raising expectations that the European Central Bank will be ready to ease monetary policy, not only at its meeting next week, but also going forward.

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