Dollar Climbs After Surprise Gain in Services ISM

The dollar rose Thursday as an unexpected gain in U.S. services sector activity eased concerns that the Federal Reserve may have to cut interest rates later this year to shore up a slowing economy.

The greenback erased early losses against the euro after the Institute for Supply Management's non-manufacturing index rose in June to its highest in a year, beating forecasts of a modest decline.

"The data is certainly consistent with a view that the recovery in the service sector since the March low is no fluke," Alan Ruskin, chief international strategist at RBS Greenwich Capital, wrote in a note to clients.

Earlier in the session the dollar slumped to another 26-year low against sterling after the Bank of England raised interest rates as expected to 5.75% and said inflation risks remained to the upside.

The European Central Bank kept rates on hold at 4% but suggested it would raise borrowing costs again in coming months to fight inflation. The dollar is rapidly losing its allure to yield-hungry investors as rates rise overseas, and the messages from Thursday's central bank meetings underscored the issue.

The euro traded down against the dollar, well below a high of $1.3660 hit earlier in the session but still not far short of a record high just above $1.3680 struck in April.

Many traders remain bearish on the dollar, but with sterling already at 26-year highs and the euro also just short of record peaks against the dollar, some were locking in short-term gains.

"Sterling and the euro have both had a pretty good run, and what we're seeing is that with the Bank of England and ECB out of the way, people are taking some profits," said John McCarthy, director of foreign exchange trading at ING Capital Markets in New York. "The medium-term trend, though, is unchanged."

Sterling was down against the dollar, retreating from a peak of $2.0202 hit shortly after the BoE rate rise.

The dollar rose versus the yen. The Japanese yen, the world's lowest-yielding major currency, also hit another record low of 167.29 against the euro , according to electronic trading platform EBS.

ECB President Jean-Claude Trichet said Thursday that he did not intend to sway the market's expectations about the future path of monetary tightening in the euro zone.

Analysts took this to mean that futures prices indicating a two in three chance of an ECB rate hike by September, and a dead certainty of a rise by October, were on the mark.

In contrast, most observers expect the Federal Reserve to keep interest rates on hold until the end of the year, with futures pricing in a 1-in-10 chance of a rate cut.

Investors may gain a little more clarity on the state of the U.S. economy on Friday, when the closely watched nonfarm payrolls report is due. ADP Employer Services said Thursday that private employers likely added 150,000 jobs in June, 50% more than economists' median forecast.