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NEW YORK (MarketWatch) — The dollar fell slightly against major European currencies Wednesday, erasing early gains after a U.S. economic report showed business activity in the Chicago contracted this month.

The Chicago Purchasing Managers Index fell to 48.8 in January from 51.6 in December, suggesting a contraction in the regional manufacturing sector. Economists polled by MarketWatch were expecting a reading of 52. A reading above 50 would signal growth.

But Brian Dolan, director of research at, a division of Gain Capital, cautioned that “manufacturing accounts for an ever smaller portion of U.S. economic activity so the Chicago PMI should not have much of a lasting effect, even though it’s below the 50 boom/bust line.”

In New York trading, the euro stood at $1.2984, compared with $1.2965 late Tuesday. The dollar was quoted at 121.42 yen, compared with 121.59 yen.

The British pound traded at $1.9539, compared with $1.9622. The dollar changed hands at 1.2497 Swiss francs, compared with 1.2519 francs.

The euro fetched 157.55 yen, compared with 157.66 yen.

The Federal Open Market Committee, the Fed’s policy-setting panel, is widely expected to leave overnight borrowing costs unchanged at 5.25%. Traders will be closely watching the accompanying statement for clues on future rate moves. The rate announcement is due at 2:15 p.m. Eastern.

Ashraf Laidi, chief foreign-exchange analyst at CMC Markets in New York, said that “there has been much talk about today’s FOMC statement being more hawkish than the December statement, shedding more focus on the prospects of a return to trend growth later this year rather than emphasizing the risks to inflation.

“The dollar may especially rally if the Fed removes the use of the word ‘substantial’ in its description of the slowdown in housing market,” he said.

Economy surges 3.5%

Earlier, the dollar gained against European currencies after a government report showed the U.S. economy rose at a faster-than-expected pace in the fourth quarter.

The U.S. economy shook off a summer slump and surged ahead at a greater-than-expected 3.5% annual growth rate in the fourth quarter, the Commerce Department estimated. The 3.5% growth rate was much stronger than the 2% recorded in the third quarter, and handily beat the 3% expected by economists.

Separately, a report from Automatic Data Processing Inc. showed U.S. private-sector employment rose by 152,000 in January. Adding an estimated 15,000 or so additional government jobs that aren’t included in the ADP index, the ADP report suggests nonfarm payrolls likely rose by about 167,000 in January. The Labor Department will report nonfarm payrolls data Friday morning at 8:30 a.m. Eastern. Economists polled by MarketWatch are expecting payrolls rose by 150,000.

Yen steadies on G-7 speculation

Elsewhere, the yen rallied overnight before surrendering gains amid rising speculation that the Europeans will press the Japanese authorities to halt the yen’s slide at the upcoming meeting of Group of Seven finance ministers in Germany on Feb. 9-10.

Boris Schlossberg, senior currency strategist at FXCM, said the yen saw “some very mild carry trade liquidation” after German Finance Minister Peer Steinbrueck stated that a strong euro remains a risk, “triggering off speculation that euro-zone officials are not going to sit idly by at the upcoming G-7 meeting if the euro/yen rate continues to hover near the 158.00 level.”

Carry trades refer to the practice of speculators borrowing yen at low costs and reinvesting in higher-yielding currencies and assets.

Elsewhere, U.S. Treasury Secretary Henry Paulson said the U.S. is “actively pressing” China for more foreign-exchange flexibility. He said that while China has made some progress on the yuan issue, the pace has not been fast enough.



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