By Vivianne Rodrigues
NEW YORK (Reuters) - The dollar fell against the euro on Wednesday after a report showed the U.S. private sector shed more jobs than expected in June, which may diminish the likelihood of a rate increase by the Federal Reserve.
In contrast, investors bought the euro ahead of an expected interest rate hike by the European Central Bank on Thursday. The ECB is widely seen raising its key lending rate by 25 basis points to 4.25 percent and President Jean-Claude Trichet's news conference after the meeting may indicate further increases.
Higher benchmark rates in Europe will boost the return of euro-denominated assets and weigh on the greenback.
In the United States, private employers slashed 79,000 jobs in June, the largest drop since November 2002, according to a private report by ADP Employer Services. For details, see
The ADP data is often seen as a gauge for the government's monthly report on the labor market, which is slated for release on Thursday, earlier than usual ahead of the U.S. Independence Day holiday. Economists polled by Reuters expect another drop in U.S. non-farm payrolls last month.
"The (ADP) headline bodes unfavorably for the U.S. dollar," said Stephen Malyon, senior currency strategist at Scotia Capital in Toronto. "The fact that ADP has not been a good predictor of non-farm payrolls in 2008 could soften the impact, however, given other evidence of a deteriorating labor market, expectations for tomorrow's number have probably worsened."
In morning trading in New York, the euro was 0.4 percent higher at $1.5841, having earlier topped at $1.5872 -- a level last seen in late April. It was 0.5 percent firmer versus the Japanese currency at 168.23 yen.
European stocks gained on Wednesday, recovering from losses earlier in the week.
More fuel for ECB hawks came from euro zone producer prices which were above forecast at 7.1 percent year on year in May, with euro zone headline inflation running at 4.0 percent.
"It's fair to say that there has been an upward trend (for the euro) but there's a fair amount of nervousness ahead of tomorrow," said Niels Christensen, FX strategist Nordea in Copenhagen.
The greenback was little changed against the yen at 106.13 and it slid 0.2 percent against a basket of currencies to trade at 72.191.
U.S. Treasury Secretary Henry Paulson was quoted as saying on Wednesday the U.S. economy faced a tough second quarter and Europe would not be immune to the impact.
Sterling fell broadly as tumbling UK housing shares and a profit warning from retailer Marks and Spencer cast a further shadow over the slowing British economy.
The pound fell earlier 0.5 percent to $1.9857, while the euro rose 0.5 percent to 79.54 pence.
Both euro and dollar fell versus a broadly stronger Aussie dollar, which jumped after Australian retail sales soundly beat expectations in May, challenging the official view that interest rates were high enough to curb domestic demand.
The Aussie advanced 0.7 percent to $0.9616, nearing a 25-year peak of $0.9668 set on Monday.
"Even if monetary policy is on hold in Australia, rates are still at a very high level and you've got the commodity drive as well, that seems to me the ideal recipe for sustained strength in the Aussie," said Simon Derrick, head of currency research at Bank of New York Mellon.
At 7.25 percent, Australian interest rates stand among the highest in the industrialized countries.
