Dollar gains as ADP shows better-than-expected jobs gains

By Karen Brettell

NEW YORK (Reuters) -The dollar hit a three-week high against the euro on Wednesday after the ADP national employment report showed U.S. private payrolls increased more than expected in September, ahead of Friday's highly anticipated jobs data.

Traders are also keeping a close eye on geopolitical tensions a day after Israel was attacked by Iran in a strike that raised fears the oil-producing Middle East could be engulfed in a wider conflict.

Private payrolls increased by 143,000 jobs last month after rising by an upwardly revised 103,000 in August, the ADP National Employment Report showed on Wednesday. Economists polled by Reuters had forecast 120,000 job additions.

"The ADP number looked pretty good and points to a decent NFP print," said Brad Bechtel, global head of FX at Jefferies in New York.

The government nonfarm payrolls report for September on Friday is expected to show employers added 140,000 jobs during the month, while the unemployment rate stayed steady at 4.2%, according to economists polled by Reuters.

Improving economic data and more hawkish comments from Federal Reserve Chair Jerome Powell on Monday have boosted the dollar and led traders to pare bets that the U.S. central bank will cut rates by another 50 basis points when it meets next month.

There is "a little bit of a subtle shift here where people are less concerned about the U.S., pricing less in terms of aggressive rate cuts here in the U.S., and shifting views on other areas," Bechtel said.

Traders are now pricing in a 35% probability of a 50 basis point cut at the Fed's Nov. 6-7 meeting, down from 57% a week ago, the CME Group's FedWatch Tool shows.

Richmond Fed President Thomas Barkin said on Wednesday that the 50 basis point cut last month was an acknowledgement that its policy rate was "out of sync" with where the economy stands, but shouldn't be taken as a sign that the battle with inflation is finished.

The Institute for Supply Management's non-manufacturing report on Thursday will also provide further clues on the strength of the U.S. economy.

The dollar index rose 0.42% to 101.68, the highest since Sept. 11 and the euro fell 0.27% to $1.1037, the lowest since the same date.

The single currency has weakened on increasing expectations that the European Central Bank will cut interest rates later this month as inflation recedes.

Euro zone inflation is increasingly likely to ease back to the ECB's 2% target, ECB board member Isabel Schnabel said, dropping her long-standing warning about the difficulty of taming price growth.

The yen also fell after Prime Minister Shigeru Ishiba said Japan is not in an environment for an additional rate increase, an apparent effort to shake off his reputation as a monetary hawk, after a meeting with Bank of Japan Governor Kazuo Ueda on Wednesday.

The dollar gained 1.94% to 146.34 yen.

The greenback has also benefited from safe-haven demand on concerns about escalating tension in the Middle East.

Israeli Prime Minister Benjamin Netanyahu promised that Iran would pay for its missile attack against Israel on Tuesday, while Tehran said any retaliation would be met with "vast destruction," raising fears of a wider war.

In cryptocurrencies, bitcoin fell 0.11% to $60,712.

(Reporting By Karen Brettell; Additional reporting by Harry Robertson and Tom Westbrook; Editing by Jan Harvey and Lisa Shumaker)