* Dollar falls on signs of weakness in labor markets
* ADP report shows higher-than-expected U.S. job losses
* Markets anticipate ECB rate hike to 4.25 pct
(Recasts; adds comments, updates prices)
NEW YORK, July 2 (Reuters) - The dollar dropped against the
euro on Wednesday after a report showed the U.S. private sector
shed more jobs than expected in June, which may diminish the
likelihood of a rate increase by the Federal Reserve.
The ADP Employer Services data, which showed the largest
drop since November 2002, is often seen as a precursor to the
government's monthly report on the labor market, which is
slated for release on Thursday.
The U.S. government report is earlier than usual because of
Friday's U.S. Independence Day holiday. Economists polled by
Reuters expect another drop in non-farm payrolls last month.
For ADP details, see [].
In contrast, investors bought the euro ahead of an expected
interest rate hike by the European Central Bank on Thursday.
The ECB is widely expected to lift its key lending rate by 25
basis points to 4.25 percent, and President Jean-Claude
Trichet's news conference after the meeting may indicate
further increases.
Higher benchmark rates in Europe will boost the return of
euro-denominated assets and weigh on the greenback.
"The (ADP) headline bodes unfavorably for the U.S. dollar,"
said Stephen Malyon, senior currency strategist at Scotia
Capital in Toronto. "The fact that ADP has not been a good
predictor of non-farm payrolls in 2008 could soften the impact,
however, given other evidence of a deteriorating labor market,
expectations for tomorrow's number have probably worsened."
In late trading in New York, the euro was 0.6 percent
higher at $1.5877 <EUR=>, having earlier topped at $1.5888 -- a
level last seen in late April, according to Reuters data.
It was 0.5 percent firmer against the Japanese currency at
168.34 yen <EURJPY=>.
More fuel for ECB hawks came from euro zone producer
prices, which were above forecast at 7.1 percent year-on-year
in May, with euro zone headline inflation running at 4.0
percent.
"The short-dollar bias heading into tomorrow's ECB decision
helped to explain the sizable reaction to the ADP report this
morning," said Michael Woolfolk, a senior currency strategist
at The Bank of New York Mellon.
"The 'trifecta' of an ECB rate hike, hawkish comments by
Trichet and a negative non-farm payrolls report should provide
sufficient ammunition for speculators to mount an attack on the
1.6000 level in the euro-dollar."
Some analysts did not rule out the ECB hiking by as much as
50 basis points.
"Hiking by 50 (basis points) would help Trichet get a leg
up on inflation and this should be positive for the euro even
if he says that 50 is all that the market will get this year,"
Kathy Lien, chief strategist at DailyFX.com, said in a note to
clients.
The greenback edged lower against the yen to 105.97 <JPY=>
and slid 0.5 percent against a basket of currencies to trade at
72.029 <.DXY>.
U.S. Treasury Secretary Henry Paulson was quoted as saying
on Wednesday that the U.S. economy faced a tough second quarter
and Europe would not be immune to the impact. []
The Treasury also said high oil prices, further home price
declines and capital markets turmoil will prolong the American
economic slowdown, while Europe and Britain were also showing
signs of slower growth. []
Another report on Wednesday showed U.S. May factory orders
rose 0.6 percent. []
AUSTRALIAN DOLLAR GAINS
Sterling fell broadly as tumbling UK housing shares and a
profit warning from retailer Marks and Spencer <MKS.L> cast a
shadow over the slowing British economy.
Later in the session Charlie Bean, Bank of England deputy
governor, said the British economy is facing its most
challenging time since at least the early 1990s.
The pound fell as low as $1.9846 and was last down 0.1
percent at $1.9928 <GBP=>, while the euro rose 0.7 percent to
79.66 pence <EURGBP=>.
Both the euro and the dollar fell agains a broadly stronger
Aussie dollar, which jumped after Australian retail sales
soundly beat expectations for May, challenging the official
view that interest rates were high enough to curb domestic
demand. []
The Aussie advanced 0.7 percent to $0.9622, nearing a
25-year peak set on Monday.
At 7.25 percent, Australian interest rates are among the
highest in the industrialized countries.
(Reporting by Nick Olivari and Vivianne Rodrigues; Editing by
Jonathan Oatis)
