LONDON: The currency market's risk appetite remained strong on Thursday, with the Australian dollar reaching a three-month high and the safe-haven yen ceding ground to the U.S. dollar and the euro.
The focus will be on the U.S. non-manufacturing ISM report, with investors eyeing the employment component for clues about Friday's non-farm payrolls report. A solid report on Friday could bolster expectations that the Federal Reserve remains on track to raise interest rates this year and boost the dollar.
The dollar was up 0.5 percent at 114 yen, not far from the previous day's two-week high of 114.56. Even the low-yielding euro was up 0.6 percent at 123.95 yen.
"We are seeing better risk appetite weighing on the yen," said Niels Christensen, FX strategist at Nordea. "The focus is on the ISM report, and if, like the manufacturing survey, it is a good one, then we could see the dollar move higher."
Surveys released earlier this week showed U.S. manufacturing stabilising in February, with production accelerating and new orders holding steady at higher levels.
And on Wednesday, the ADP National Employment Report showed U.S. private-sector jobs rose a surprisingly strong 214,000 in February, adding to speculation Friday's payrolls report would also be upbeat.
But a Federal Reserve survey found that economic conditions varied considerably across regions and within sectors, clouding the employment picture. That presents a conundrum for Fed policymakers when they next meet to decide the path of interest rates on March 15-16.
U.S. federal funds futures imply traders see a slim chance of the Fed raising rates at its coming meeting, according to Reuters' FedWatch program.
The euro was flat at $1.0870, hovering above the previous day's one-month trough of $1.0825. Investors remained wary of the euro after another European Central Bank policymaker hinted it would take action at next week's policy review.
Executive Board member Benoit Coeure said euro zone banks can deal with rock-bottom interest rates and actually benefit from the central bank's efforts to prop up growth and inflation .
"We are underweight the euro and expect it to weaken towards $1.05," said Ryan Myerberg, portfolio manager at Janus Capital International, adding that the market was also underpricing the chances of the Federal Reserve raising rates.
The Australian dollar was up 0.5 percent to $0.7336 , its highest since early December, having rallied 1.7 percent on Tuesday. Investors warmed to the currency after data showed fourth-quarter economic growth unexpectedly picked up to an annual 3.0 percent.
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