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Dollar Tops Three-Month High Vs. Yen on Strong Midwest Economic Data

The dollar touched a three-month peak against the yen after a strong report on business activity in the U.S. Midwest, but it failed to sustain gains before key payrolls data due on Friday.

The Chicago Purchasing Management Index report also included the highest reading of prices paid by factory managers since August 2006, reinforcing the view the Federal Reserve may keep rates steady this year, and it offset revised data released earlier in the day showing weaker U.S. growth in the first quarter.

"The Chicago PMI data support the Fed's view that inflation remains a top concern, and at these levels it may be enough to keep pushing back expectations for a rate cut this year," said David Watt, senior currency strategist at RBC Capital Markets in Toronto. "But now the focus is shifting to the payrolls report tomorrow. We are not likely to see a sharp move on the dollar before the jobs data."

Against the yen, the dollar climbed as high as 121.99 yen, the highest since mid-February, according to electronic trading platform EBS. It last traded .

Earlier, the dollar slipped after the government revised down its estimate for first-quarter growth, showing the U.S. economy grew at its slowest pace in more than four years.

Analysts have widely discounted a soft economic growth reading and the lower-than-expected result failed to have a sustained impact on the market.

The dollar has clawed its way back from a record low hit against the euro in April and a 26-year low against the pound as worries about the U.S. economy's health have eased, reducing speculation of lower interest rates that would erode the greenback's yield appeal.

The euro was up , remaining within well-worn ranges for the last month.

After the data releases, the implied chances of a rate cut this year were down to about 30 percent from about 40% late on Wednesday, according to Reuters data. Markets still expect the Fed to hold rates steady at its next monetary policy meetings in June and August.

With Thursday's U.S. data out of the way, traders are focused on the release of the May U.S. non-farm payrolls report on Friday. Economists forecast an increase of 130,000 jobs. A derivatives auction on Thursday showed traders betting on a 121,200 jobs gain.

Jitters before the jobs data and month-end "fixes" -- cut-off rates for currencies given at the end of the London trading session -- also helped push the dollar lower against sterling, traders said.

"People are a little concerned about what's going to happen tomorrow when we get the non-farm payrolls number," said Steven Butler, director of foreign exchange trading at Scotia Capital in Toronto. "We're now into the month-end fixes. Markets are just basically working through some positions."

In early afternoon, sterling traded .

"There was dollar selling going into the 11 a.m. fix and markets were just covering their positions," he added. "The sharp rise in cable happened as we go through the fix, but the euro is still stuck in a range between $1.34-35."

Against the Canadian dollar , the greenback fell to a 29-1/2-year low at C$1.0666 on data showing that Canada's economic growth outpaced that of the United States in the first quarter. After three quarters of sub-trend growth, Canada's real gross domestic product growth bounced back to 3.7% from the previous quarter.

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