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Dollar Up Against Major Currencies

The dollar built on Wednesday's gains versus most major currencies this morning, as investors bet that talk of nearer-term interest rate cuts in the U.S. had been overdone.

There was little reaction in the currency markets to a report showing growth in the service sector slowed in December.

The Institute for Supply Management's services index edged lower to 57.1 in December from 58.9 in November, broadly in line with market expectations. The median forecast of Wall Street economists was for a slight dip to 57.0.

A number above 50 indicates growth in the sector.

A pick up in manufacturing activity on Wednesday pushed back expectations on the timing of possible monetary easing by the Federal Reserve, putting key U.S. jobs data on Friday and
service sector figures later today in the spotlight.

Dealers said liquidity remained thin as some participants were still absent due to seasonal holidays, exacerbating currency moves.

"People have been buying dollars perhaps on the assumption that talk of rate cuts in the U.S. by the end of the first quarter may have been overdone, that's the fundamental story today," GNI currency strategist Mark Henry said.

"The dollar is a little bit weaker as it has come to the end of the interest rate cycle but it's not an economy that is about to collapse," he added.

The single European currency had fallen 0.9% versus the dollar on Wednesday, its biggest one-day decline since the middle of last July.

The dollar is roughly even against the yen, after hitting a 2-1/2 month peak on Wednesday of 119.68 yen.

The euro eased from Wednesday's record peaks against the yen after an assortment of euro zone numbers came in strong, but not as robust as some had expected -- leaving the euro area rate outlook pretty much intact.

The yen was still looking vulnerable overall having fallen to fresh eight-year lows against sterling and nine-year lows versus the Australian dollar this week, dragged down by its low-yielding status.

Even if the BOJ boosts rates this month from 0.25%, the yen's weak trend is unlikely to be reversed, traders and analysts said, adding any subsequent hikes would probably be made only gradually.

Euro zone annual inflation in December was unchanged from November at 1.9%, according to a first estimate from the European Union's statistics agency.

Meanwhile, euro area service sector growth eased, as the RBS/NTC Eurozone services business activity index dipped to 57.2 from 57.6 in November.

The European Central Bank is widely expected to raise rates to 3.75% in February or March and could tighten again later in the year if growth and inflation stay strong.

On Wednesday, the ADP National Employment Report for December showed the first monthly net job loss in the private sector since 2003.

This lead some traders to speculate that the more closely watched non-farm payrolls could also be softer than expected, which would strengthen the view the Federal Reserve may start
cutting rates from the current 5.25%.

Minutes from the Fed's December meeting indicated the bank sees increased downside risks to economic growth but inflation remains a dominant concern.

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