Dollar off lows vs. yen after U.S. data, Portugal in focus

The dollar pulled back from session lows against the yen on Wednesday following the release of strong U.S. employment data but demand for the safe haven yen continued to be underpinned amid concerns over an escalating political crisis in Portugal.

During European afternoon trade, the dollar trimmed losses against the yen, with USD/JPY dropping 0.91% to 99.69, up from lows of 99.26.

Payroll processor ADP said the U.S. private sector added 188,000 jobs in June, more than expectations for an increase of 160,000.

Separately, the U.S. Department of Labor said of people who filed for unemployment assistance last week fell by 5,000 to a seasonally adjusted 343,000, compared to expectations for a drop of 3,000 to 345,000.

Investors were looking ahead to Friday’s U.S. nonfarm payrolls data, for further clues on when the Federal Reserve may decide to unwind its USD85 billion-a-month stimulus program.

The yen remained stronger against the dollar and the euro on Wednesday as market sentiment was hit by concerns over political instability in Portugal, following the resignation of country’s foreign minister on Tuesday and the finance minister on Monday in protest over government austerity policies.

The political crisis raised doubts over the future of the country's coalition government and its ability to honor bailout commitments.

Meanwhile, the euro pulled back from five-week lows against the dollar, with EUR/USD down 0.08% to 1.2967, after falling as low as 1.2924.

The single currency found support after official data showed that euro zone retail sales rose 1% in May, outstripping expectations for a 0.2% gain.

In addition, revised data showed that the euro zone services purchasing managers’ index ticked up to 48.3 in June from a final reading of 47.2 in May.

Investors remained cautious ahead of Thursday’s European Central Bank policy meeting. ECB President Mario Draghi was expected to reiterate that an exit from loose monetary policy remains distant.

Elsewhere, the dollar fell to session lows against the pound, withGBP/USD up 0.76% to 1.5268 after data showed that service sector activity in the U.K. expanded at the fastest pace since March 2011 in June.

Markit said the U.K. services PMI rose to a 27-month high of 56.9 in June from 54.9 in May, compared to expectations for a decline to 54.5.

The data boosted the outlook for second quarter growth and lowered the chances for additional easing measures by the Bank of England at its monthly policy meeting on Thursday.

The dollar remained lower against the traditional safe haven Swiss franc, with USD/CHF down 0.26% to 0.9480. 

The greenback was mixed to higher against its Australian, New Zealand and Canadian counterparts, with AUD/USD down 0.73% to hit three-year lows of 0.9080, NZD/USD inching up 0.05% to 0.7754 and USD/CADslipping 0.16% to 1.0529.

The Aussie weakened after Reserve Bank Governor Glenn Stevens said the board "deliberated for a very long time" on Tuesday before deciding to keep its key interest rate unchanged at a record low 2.75%, signaling the possibility of further rate cuts in the coming months.

The dollar index, which tracks the performance of the greenback versus a basket of six other major currencies, was down 0.32% to 83.54. 

The ISM was to produce a report on U.S. service sector activity later in the trading day.