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Dollar rallies after losses; focus on U.S. non-farm payrolls

Frank van den Bergh | E+ | Getty Images

The dollar gained on Wednesday, recovering from six-week lows hit the previous session, as investors squared positions ahead of Friday's U.S. non-farm payrolls report, data that should help determine the timing of the next interest rate hike.

The greenback had been on its best run of weekly gains in 1-1/2 years until last week, when expectations the Federal Reserve would clearly signal a near-term rate hike were disappointed and U.S. growth data came in much weaker than expected.

In mid-morning trading, the dollar index rose 0.49 percent to 95.55. On Tuesday, the index hit a six-week low and was still down a slight 0.2 percent so far this week.

Data on Wednesday showing the U.S. private sector added 179,000 jobs in July, more than economists had expected, gave the dollar a minor boost. The report, released by payrolls processor ADP, suggested that the labor market continues to improve, although it has not altered expectations on when the Fed might raise interest rates.

Fed funds futures still see a 12 percent chance the Fed will increase rates next month, unchanged from Tuesday, according to the CME's FedWatch. For the December meeting, the probability of a Fed hike dipped to 34 percent from about 38 percent.

"We would still caution a December rate hike from the Federal Reserve has better odds of materializing than what the broader market is currently pricing in," said Scott Smith, director of hedging solutions for North America at Cambridge Global Payments in Toronto.

The dollar also rebounded from three-week lows versus the yen, with investors leery of further buying the Japanese currency after Japan's top currency diplomat, Mastsugu Asakawa, stepped up his jawboning against a rising yen on Wednesday. He warned speculators against pushing up the currency too rapidly.

"The comments suggest heightened sensitivity to yen appreciation in the government and warrant the market's attention," said Shaun Osborne, chief FX strategist, at Scotiabank in Toronto.

The dollar rose 0.07 percent to 101.16 yen. It slid 1.5 percent the previous day when it fell to a three-week trough.

The yen has been gaining against the dollar as speculators were emboldened by what was viewed as less aggressive easing and stimulus measures by the Japanese government to bolster its economy. The Japanese currency has gained nearly 19 percent against the dollar so far in 2016.

The euro, meanwhile, fell 0.63 percent against the dollar to $1.11, hurt by the dollar's broad recovery.