The dollar held near a six-week high on Thursday as an overnight jump in U.S. Treasury yields prompted investors to buy the greenback before monthly jobs data on Friday which may show the U.S. economy growing at a robust pace.
The Institute for Supply Management's (ISM) non-manufacturing activity index jumped 3.1 points to 61.6 last month, the highest reading since August 1997, and the ADP National Employment Report showed private payrolls jumped by 230,000 jobs in September, the largest gain since February.
The upbeat data on Wednesday followed confident remarks by U.S. Federal Reserve Chairman Jerome Powell who said the Fed may raise interest rates above an estimated "neutral" setting as the "remarkably positive" U.S. economy grows.
The data comes before the widely watched monthly payrolls data on Friday.
"The combination of a higher-than-expected ADP employment report and the strong ISM survey suggest upside risks to the employment report," Morgan Stanley strategists said.
Yields on benchmark 10-year U.S. Treasury yields jumped nearly 12 basis points on Wednesday to 3.23 percent, its highest level since mid-2011 after private payrolls data was stronger than forecasts.
The combination of strong data and hawkish comments sent the dollar index up to 96.1, its highest since Aug. 20 and nearing a 2018 high of 96.99 hit in mid-August before it gave up gains and turned lower on the day at 95.79.
"U.S. data this week has been quite strong and the Fed is keeping a hawkish stance, but given the magnitude of long dollar positions in the market, we are cautious of buying the dollar at these levels," said Manuel Oliveri, an FX strategist at Credit Agricole in London.
The spike in U.S. yields also pulled the gap between 10-year benchmarks between the United States and Germany to its widest in nearly three decades, at 274 basis points, and boosted the prospects of more rate hikes from the Fed in 2019, with markets now expecting two rate hikes after one in December.