Dollar edges up as ISM hits high

NEW YORK (Reuters) - The dollar rose on Tuesday, hitting a nine-week high against the yen, after a report showed U.S. manufacturing expanding at its fastest pace in almost a year.

Contrasting with recent weak economic reports that have weighed on the dollar, the headline number in the Institute for Supply Management's survey on manufacturing hit its highest level since May 2006. The employment and prices components of the survey climbed to eight-month peaks.

However, analysts cautioned that the data may provide little more than a short-term reprieve for the greenback.

"Clearly, the ISM report was good news, but it's just one number, and recent data has been overwhelmingly negative," said Omer Esiner, senior market analyst at Ruesch International in Washington. "So I'd say dollar upside is likely to be limited."

By late afternoon, the euro EUR= was near session lows at $1.3610, down 0.2 percent from late Monday but still near the $1.3683 all-time high hit last week, according to electronic trading platform EBS.

The dollar rose 0.3 percent to 119.74 yen JPY=, near a nine-week high at 119.90 and the psychologically important 120 level. Against the Swiss franc, the dollar rose to a two-week high of 1.2164 francs CHF=.

The dollar has fallen sharply in the past year, tumbling to 26-year lows against sterling and lifetime lows against the euro, mainly due to slower U.S. growth at a time when other major economies continue to expand.

Before the ISM data's release, the euro climbed to all-time highs against the yen and Swiss franc, after German Labor Minister Franz Muentefering said the country's unadjusted unemployment rate fell to its lowest in 4-1/2 years in April.

"The bias (toward the dollar) is still negative, and we should expect (investors) to keep buying the euro on dips," said Ashraf Laidi, currency analyst at CMC Markets in New York.

DOLLAR DANCES HIGHER

Slower U.S. growth has investors expecting the Federal Reserve to cut interest rates at least once this year.

Esiner said the market's Fed outlook is "a sharp contrast with that for other major central banks," including those in the euro zone and Britain, which are expected to push rates still higher.

A key focus for the market remains the April U.S. employment report due on Friday. While the median forecast according to Reuters is 100,000 jobs created last month, a higher-than-expected number could lift the dollar further from its record lows against the euro.

Esiner said a surprisingly strong jobs report could push the euro toward $1.3450, a level last seen in mid-April.

"We go through a bit of a dance each month where we focus on housing at the end of the month and that takes the dollar lower and then we get more up-to-date data on manufacturing and employment conditions and things start to look a little better," said Robert Sinche, head of liquid products strategy with Bank of America in New York.

Elsewhere, the euro was unchanged at 163.01 yen EURJPY=, having hit a lifetime peak of 163.31 earlier. It also hit a record high against the Swiss franc at 1.6522.

Sterling was steady against the dollar GBP=, paring earlier gains driven by a survey showing UK retail sales growing at their fastest pace in nearly three years.