The dollar rose to a one-month high against a basket of currencies Wednesday after reports showing robust job growth and productivity gains suggested a milder slowdown in the U.S. economy than many had thought.
The ADP employer services report showing the U.S. economy added 189,000 private-sector jobs last month also indicated that key government data on Friday may show similar signs of strength in the labor market.
That eased some market fears about trouble in global credit markets that had weighed on the greenback in recent sessions.
"This number not only beat market expectations but exceeded even the most wildly bullish projections," said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon in New York. "It suggests things may not be as bad as thought, though what the market and Fed do will depend on the non-farm payrolls number (on Friday)."
The data was a pleasant surprise for markets, as economists polled by Reuters had expected Wednesday's report to show a payrolls increase of just 50,000.
The government's jobs report, which also includes public-sector employment, will be released Friday.
Economists expect that report to show a 75,000 increase in jobs last month, according to the median forecast in a Reuters poll.
In New York, the euro traded lower against the dollar. The New York Board of Trade's U.S. dollar index, which measures the greenback's value against a basket of six currencies, traded 0.8 percent higher at 76.268, below the day's peak but still a one-month high.
Demand for the U.S. currency started to rise earlier in the session as a rebound in global equity markets prompted investors to buy back dollars after two days of declines.
Stocks rose in Asia and Europe and U.S. benchmark stock indexes also gained.
In another report, the Labor Department said revised third-quarter non-farm output rose at its fastest pace in four years, while unit labor costs, a measure of inflation, showed the largest decline in four years.
In addition, the Institute for Supply Management said its non-manufacturing index, which measures activity among services companies, showed expansion.
The dollar rose about 1 percent against the yen as short-term players took profits on the yen's rise from the previous two days -- a move which had been fueled by worsening credit market conditions before the usually illiquid year-end.
The Federal Reserve will mull the latest economic reports when it meets next Tuesday.
The ADP report "was the best number in a year," said Cary Leahy, an economist at Decision Economics in New York. "If it points to similar strength in the Labor Department's employment report (due on Friday), I would be quite surprised if the Fed cut the fed funds rate 50 basis points."
Traders trimmed bets on an aggressive 50 basis point cut in fed funds next Tuesday after the employment report. Rate futures indicate traders see a 38 percent probability of a half-percentage point cut, down from a 54 percent probability just before the data.
Sterling fell earlier to a 4-1/2-year low against the euro of 72.32 pence per euro after weaker-than-expected service sector and house price data increased expectations the Bank of England will cut interest rates on Thursday to 5.5 percent.
The Australian dollar fell after the Reserve Bank of Australia kept interest rates at 6.75 percent, as expected, but said global growth could ease in 2008.