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Dollar Firms on U.S. Productivity Growth, Stronger Service Sector

The dollar rose broadly for the third straight day on Thursday, its longest rally in two months, after solid U.S. service sector data eased some concerns about the economy ahead of April's payrolls report.

The greenback rose to a two-month high against the yen following a higher-than-expected April non-manufacturing index from the Institute for Supply Management. Along with productivity and jobless claims data released earlier, the report reflected an improved outlook for the U.S. economy.

"The market has been feeling a little better about the dollar the last couple of days, and this report helps, though it's not exactly out of the woods yet," said Steven Butler, director of foreign exchange trading at Scotia Capital in Toronto.

The dollar was , near highs last seen on Feb. 27, when a wave of risk aversion boosted the Japanese currency.

The dollar index -- a measure of the dollar's value against a basket of six major currencies -- rose 0.23% to 81.931. Earlier, it rose to the highest since April 17.

The euro fell to an intraday low of $1.3547, down 0.3% from late Wednesday and more than a cent away from record highs hit last week above $1.3680. Solid technical support lies in the $1.3550 area, analysts said.

The greenback rebounded modestly against the high-yielding Australian and New Zealand dollars, especially with benchmark U.S. Treasury yields rising for three consecutive sessions.

The Payrolls Number Cometh

This week's economic data has prompted investors to pare bets against the greenback heading into Friday's payrolls report on the view it may beat economists' forecast of 100,000 new jobs in April.

But some analysts warn that with the U.S. economy having logged four consecutive quarters of below-trend growth, the dollar still faces an uphill climb.

"Payrolls, while important, is just one piece of data among many I would need to change my outlook on the dollar," said Jim Griffin, senior vice president for global foreign exchange at Union Bank of California in Los Angeles.

A better-than-expected payrolls reading will be good for short-term dollar gains only, he said, adding "more consistent appreciation to make back its losses is going to need a lot more than that."

The dollar has weakened broadly over the past year and remains near its recent 26-year low against sterling and lifetime low against the euro.

Further weighing on the greenback are signs of continued growth in other major economies, including Britain and the euro zone, at a time when the U.S. economy seems to be sputtering.

Recent upbeat data from the euro zone has reinforced expectations of an interest rate increase from the current 3.75% in June, with perhaps more later this year.

Meanwhile, most investors still expect the Federal Reserve to cut U.S. rates this year, though the timing of the Fed's next move remains difficult to predict.

Griffin said comments from Fed officials next week, including views on U.S. inflation, will be important for currency traders.

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