* Strong data raises prospect of December rate hike
* Friday’s payrolls report in focus
* Fed Chair odds seen moving away from Warsh (Updates with U.S. market open, adds data, quotes, changes dateline, previous LONDON)
By Karen Brettell
NEW YORK, Oct 4 (Reuters) - The U.S. dollar pared losses on Wednesday after data showed a service sector index increasing to its highest level in more than 12 years, boosting the likelihood that the Federal Reserve will raise rates at its December meeting.
The Institute for Supply Management’s non-manufacturing index rose to its highest level since August 2005 in September and the prices paid index reached its highest level since February 2012.
“The data seems to be supportive all the way across the board for a Fed hike in December,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management.
It came after data on Monday showed that U.S. factory activity surged to a more than 13-year high in September.
The dollar index was last down 0.7 percent at 93.479, after earlier falling as low as 93.259.
Interest rate futures traders are now pricing in an 83 percent likelihood of a December rate increase, up from 78 percent on Tuesday, according to the CME Group’s FedWatch Tool.
Data earlier on Wednesday showed that U.S. private employers added 135,000 jobs in September, topping economists’ expectations even as Hurricane Harvey and Irma “significantly impacted smaller retailers.”
Stronger U.S. data along with the prospect of U.S. tax cuts and the likelihood of an interest rate increase in December have boosted the U.S. currency in recent weeks.
Traders have been cautious this week on the greenback, however, ahead of a busy calendar of economic data releases that will culminate in Friday’s employment report for September.
“People were afraid of the impact of hurricanes on payrolls,” said Schlossberg.
Investors are also adjusting for the likelihood that U.S. President Donald Trump will appoint a less hawkish head of the Federal Reserve than previously expected.
Politico reported on Tuesday that Treasury Secretary Steven Mnuchin favors the appointment of Fed Governor Jerome Powell as Fed Chair over former governor Kevin Warsh, who is seen as more hawkish.
Several news reports on Wednesday also showed opposition to Warsh’s candidacy.
“Only a couple of days ago everyone was going for Warsh as successor, who the market saw as standing for a much tighter U.S. policy,” said Commerzbank’s head of currency research in Frankfurt, Ulrich Leuchtmann.
“Now everyone is thinking that Powell is the more likely choice and thinking of Powell as someone who will do very, very gradual policy incrementations,” Leuchtmann said. (Additional reporting by Jemima Kelly and Fanny Potkin in London; Editing by Andrea Ricci)