Private jobs report buoys dollar

A bank clerk carries bundles of U.S. bank notes in Seoul, January 4, 2006. The dollar climbed against a basket of major currencies on Wednesday after a report the British government may nationalize troubled mortgage lender Northern Rock helped soothe jitters over the credit market turmoil a little.

NEW YORK (Reuters) - The dollar scaled a one-month peak against a basket of currencies on Wednesday after a robust private jobs report suggested the U.S. labor market remained relatively healthy despite an economic slowdown.

The euro recorded its biggest single-day decline against the dollar since July 2005, with traders saying the market was expecting European Central Bank officials to tone down their rhetoric on inflation after Thursday's policy meeting.

The surprise jump in private-sector employment in the ADP report fanned expectations of an above-forecast nonfarm payrolls report on Friday, prompting the market to trim chances of a 50-basis-point interest rate cut by the Federal Reserve next week.

Worries that the Fed could opt for a deeper cut after the Bank of Canada surprised markets with a rate cut on Tuesday were blamed for the dollar's decline in the previous session.

"We can attribute the dollar's strength today to the ADP report. The sharp upside surprise to the ADP jobs number suggests that we could see a better-than-forecast reading of Friday's nonfarm payrolls number," said Omer Esiner, foreign exchange analyst at Ruesch International in Washington.

"This in turn would lower the risk of a 50-point cut by the Fed on Tuesday. Relative strength in the jobs market here in the U.S. is something that can keep the Fed from cutting rates more aggressively."

In late New York trade, the euro traded 1.1 percent lower at $1.4595, after dipping to a session trough of $1.4592, according to Reuters data.

The New York Board of Trade's U.S. dollar index .DXY, which measures the greenback's value against a basket of six currencies, traded 1.1 percent higher at 76.459, after earlier hitting a one-month high of 76.528.

Against the dollar, sterling fell 1.6 percent to $2.0258 GBP= on mounting speculation the Bank of England, which meets on Thursday, would cut its benchmark interest rate.

"Sterling could certainly be dragging the euro down. Generally, the dollar is going to strengthen over the next couple of weeks," said Mark Meadows, currency strategist at Tempus Consulting in Washington.

"We think the Fed will cut by 25 basis points and not 50 and will likely indicate to the market a very neutral data-dependent stance, which should be dollar-positive."

Rate futures indicate traders see a 38 percent probability of a half-percentage point cut, down from a 54 percent chance just before the ADP data. A 25-basis-point cut in the fed funds rate to 4.25 percent has been fully priced in.

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.

The dollar rose to a session peak of 110.96 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.

It was trading at 110.94 yen, up 1.1 percent on the day.

Expectations that the Bank of England will reduce its key lending rate to 5.5 percent pushed sterling to a 4-1/2-year low against the euro. This followed below-forecast service sector and house price data.

"The greater likelihood is for the BOE to cut 25 basis points, with the ECB feeling obliged to prepare the market with a warning shot for a possible January rate cut," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon.

"If one or both of these developments are borne out, the dollar recovery could get some legs in earnest, taking the euro as low as the $1.45 barrier."

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. It was trading down 0.4 percent at US$0.8693.

(Editing by Jonathan Oatis)