* U.S. manufacturing ISM shows surprising contraction
* Dollar index flat ahead of payrolls
* Euro hits five-week high vs yen
By Jemima Kelly
LONDON, Sept 2 The dollar held steady on Friday
as investors awaited the most closely watched data set of the
month, the U.S. non-farm payrolls report, for clues as to
whether the Federal Reserve is to raise U.S. interest rates this
The greenback was flat against a basket of major currencies
at 95.72, having fallen 0.4 percent on Thursday, its
worst perforamance in two weeks, after a surprise contraction in
U.S. manufacturing that cast some doubts on the strength of U.S.
The result was a setback for dollar bulls, who had bet solid
U.S. data this week would cement the case for a Fed rate hike as
soon as September.
"(Thursday's fall in the dollar) tells us that there still
is a lot of scepticism over imminent rate hike by the Fed in the
market," said Commerzbank currency strategist Thu Lan Nguyen,
from Frankfurt. "There is still room for some dollar weakness."
Some analysts said that news that the world's biggest
company, Apple, would repatriate billions of dollars of global
profits to the United States next year would lend support to the
dollar at the margins, but Nguyen was sceptical about that.
"Yes, if they move a large amount, that might move the
market at some point in time, just because liquidity has become
thinner, but all in all I'm very doubtful that a single
corporation is able to sustainably move an exchange rate such as
the U.S. dollar."
The greenback rose 0.4 percent to 103.62 yen, close
to the five-week high of 104 yen hit on Thursday. The euro hit a
fresh five-week high against the Japanese currency, at 116.02
The main focus of the day was the U.S. jobs data, due at
1230 GMT. Employers are expected to have added 180,000 jobs in
August, according to the median estimate of 91 economists polled
"I would think markets will gradually price in a rate hike
unless the payrolls come below 150,000," said Minori Uchida,
chief currency analyst at the Bank of Tokyo-Mitsubishi UFJ in
Markets are pricing in a less than 1 in 4 chance of a
tightening at the Fed's next meeting on Sept 21-22, according to
CME FedWatch, despite recent comments from Fed officials
suggesting a hike is 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.
For Reuters new Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(Additional reporting by Hideyuki Sano in Tokyo; Editing by