The dollar rose to a one-month high against the yen on Wednesday after economic reports reflected growth in U.S. employment in September, boding well for Friday's non-farm payrolls data.
The greenback edged up for a third consecutive day after a report on the nation's services sector and another on private-sector payrolls indicated modest growth in the labor market last month, feeding hopes that the troubled housing market has not dragged down other parts of the U.S. economy.
As we continue to accumulate more and more data, we learn the U.S. consumer and U.S. economy have been very resilient to shocks, said Michael Woolfolk, senior currency strategist with The Bank of New York Mellon in New York.
We're anticipating a solid payrolls report on Friday, which could provide further reason to square up short dollar positions.
Meanwhile, apparent calm in global financial markets after weeks of credit market-related turmoil has emboldened investors to reenter the risky trades financed with the low-yielding yen.
The dollar rose 0.9 percent from Tuesday to 116.74 yen, while the euro climbed 0.8 percent to 165.10 yen.
The euro was trading relatively unchanged on the day at $1.4145, not far from a record high of $1.4281 hit on Monday, according to Reuters data.
Investors' cautious venture back into risky trades has helped to lift higher-yielding currencies this week, such as the Australian dollar, which has touched an 18-year high, and the New Zealand dollar.
The Australian dollar rose to an intraday high of US$0.8919, about a third of a cent away from an 18-year high of $0.8949 hit on Tuesday. It was currently up 0.6 percent at $0.8885.
THE PAYROLLS TEST
For the dollar's rally to have legs, it would have to sustain itself beyond Friday's U.S. employment report, not an easy task. Analysts say the payrolls number would have to far exceed the consensus forecast for a 94,000 gain to peel dealers away from the current dollar negative trend.
The big problem for the dollar is that it is pretty much consensus that August NFP (non-farm payrolls) overstated weakness, so we are definitely going to need a solidly above consensus NFP to get any meaningful dollar bounce out of Friday's data, said Alan Ruskin, chief international strategist with RBS Greenwich Capital in Greenwich, Connecticut.
Furthermore, long-term investors point to lengthy dollar-negative trends that show no sign of ending soon. For example, Qatar's prime minister said on Tuesday in an interview that the country's $50 billion sovereign wealth fund has slashed in half its exposure to the dollar in the last two years.
This trend of diversifying portfolios out of dollars and into currencies that are expected to appreciate in coming years is one that has been often cited as a reason for dollar weakness over the last several years.
Italian Prime Minister Romano Prodi said he and German Chancellor Angela Merkel were worried about the euro's strength, the latest officials to express their concern about the exchange rate's impact on euro zone economies.
However, market participants have thus far largely shrugged off jawboning policy-makers and focused instead on monetary policy, especially with both the Bank of England and the European Central Bank meeting on Thursday.
(Additional reporting by Steven C. Johnson)