* U.S. manufacturing ISM shows surprising contraction
* Dollar index still above this week's low ahead of payrolls
* Pound shines on strong UK manufacturing survey
By Hideyuki Sano
TOKYO, Sept 2 The dollar was on the back foot on
Friday after taking a tumble following a surprise contraction in
U.S. manufacturing in August, casting some doubts on the
strength of U.S. economic growth ahead of the closely-watched
employment data due later in the day.
The Institute for Supply Management (ISM) said its index of
national factory activity fell 3.2 percentage points to a
reading of 49.4, the first contraction since February.
The result was a setback for dollar bulls, who had bet solid
U.S. data this week would cement the case for an early rate hike
by the Federal Reserve.
The euro rose to $1.1195, having extended gains from
Wednesday's three-week low of $1.1123.
Its next target is seen around $1.1215, where it has its
100-day moving average as well as 38.2 percent retracement of
the decline from its Aug 18 peak of $1.1366.
The dollar slipped to 103.21 yen after having climbed
to as high as 104.00 yen, its highest level in over a month.
The dollar index slipped to 95.669, though it
is still above its low so far this week of 95.479, with its fate
seen hinging on the looming jobs data.
Employers are expected to have added 180,000 jobs in August,
according to the median estimate of 91 economists polled by
A stronger reading could fan expectations of a near-term
rate hike though U.S. Fed Funds rate futures are only pricing in
just over 20 percent chance of a tightening at the Fed's next
meeting on Sept 21-22, despite recent comments from Fed
officials suggesting a hike was imminent.
Cleveland Fed President Loretta Mester, a voting member on
the Fed's policy-setting committee this year, was the latest to
join the chorus on Thursday, saying the U.S. labour market is at
full strength and the Fed needs to be on a path of gradual
interest rate increases.
"The Fed could have raised rates already if it is just
focusing on the employment and wages. They will try to gauge
until the last minute whether financial markets can withstand a
rate hike," said Makoto Noji, senior strategist at SMBC Nikko
Elsewhere, the British pound jumped to a one-month
high of $1.3318 on Thursday and was last at $1.3271 after data
showed the British manufacturing sector staged one of its
sharpest rebounds on record in August.
The Markit/CIPS Purchasing Managers' Index (PMI), a closely
watched gauge of factory activity, jumped to a 10-month high of
53.3 in August, recovering from the three-year low it hit in
July after Britain's June 23 vote to leave the European Union.
The surprise strength could prompt the Bank of England to
rethink the need to cut interest rates again if other surveys
confirm the trend.
Sterling also hit one-month highs of 83.885 pence per euro
and 138.00 yen.
(Editing by Shri Navaratnam)