By Don Curren OF DOW JONES NEWSWIRES
TORONTO (Dow Jones)--The dollar rallied against the yen late Wednesday, reversing earlier losses against the Japanese currency after U.S. service-sector data for July surpassed expectations.
The greenback extended its earlier rebound and broke above the Y86 mark after news the Institute for Supply Management's non-manufacturing purchasing managers index was 54.3 in July, stronger than June's 53.8 and the 53.1 expected by economists. The closely watched employment index rose to 50.9 from 49.7 in June.
The dollar retreated broadly in recent sessions, particularly against the yen, on speculation the Federal Reserve may have to inject more monetary stimulus into the faltering U.S. economy in order to avoid deflation.
Investors remain worried about a weak July nonfarm payrolls report Friday, but the stronger U.S. data Wednesday have helped allay those fears, enabling the dollar to recover against the euro as well as the Japanese currency.
"The reaction [Wednesday] goes to show...that those fears of deflation and those fears of the Fed moving to quantitative easing are perhaps a little over-priced at this point as dollar negatives," said Amelia Bourdeau, senior G10 currency strategist at UBS AG in Stamford, Conn.
The market remains cautious ahead of the July nonfarm payroll data, which are expected to show a decline of 60,000 jobs in the month. With the overall number expected to be distorted by employees leaving due to the end of census-taking operations, markets will focus on private-employment data for the month.
"I think this shows you what could happen if we get a strong private payroll number Friday," Bourdeau said.
The dollar was at Y86.30 from Y85.85 late Tuesday, according to EBS via CQG. The euro was at $1.3146 from $1.3233. The single currency was at Y113.43 from Y113.60. The pound was at $1.5871 from $1.5948. The dollar was at CHF1.0510 from CHF1.0390.
The improved sentiment toward the greenback was reflected in the gains for the ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies. It rose to 81.008 from 80.593 late Tuesday.
The dollar had trimmed its losses against the yen ahead of the ISM data, rebounding from an eight-month low of Y85.32 touched in overnight trading.
The greenback was supported in earlier trading by the private-sector jobs report for July from payroll giant Automatic Data Processing Inc. (ADP) and consultancy Macroeconomic Advisers, which indicated a gain of 42,000, surpassing the increase of 39,000 expected by economists.
UBS's Bourdeau said the employment subindex in the ISM report probably provides a more-reliable indicator of Friday's private payrolls results than the ADP data.
The euro already had fallen back against the dollar earlier Wednesday as the latest euro-zone data disappointed growth prospects and lowered inflation expectations for the region.
Data from the U.K. were also disappointing, with its service-sector PMI falling to 53.1 from 54.4. The index was forecast to tick up to 54.5.
"For a change, [Wednesday's] positive U.S. figures have contrasted mostly weak data out of Europe giving the dollar a tentative upper hand against most major currencies," said Joe Manimbo, market analyst at Travelex Global Business Payments in Washington.
-By Don Curren, Dow Jones Newswires; 416-306-2020; don.curren@dowjones.com
