| NEW YORK
NEW YORK The dollar rose on Wednesday to its highest level in five days, just below a two-month peak, as data showed U.S. private sector payrolls rose more than expected for February, increasing investor expectations of an increase in interest rates by the Federal Reserve later this month.
U.S. private employers added 298,000 jobs last month, well above the gain of 190,000 predicted by economists surveyed by Reuters. That pushed the dollar to its highest level since March 3 against a basket of currency rivals.
The dollar gains were minimal, however, in part because it has already rallied by around 2.5 percent against a basket of major currencies .DXY over the past five weeks.
Investors were also cautious ahead of Friday's all-important non-farm payrolls report from the Labor Department as the ADP's private-sector survey has proven a poor indicator for the government's jobs report, which is favored by the Fed.
"The market certainly got ahead of itself before the (Federal Open Market Committee meeting) next week," said Dean Popplewell, chief currency strategist at Oanda in Toronto.
Hawkish comments from Federal Reserve officials last week have investors betting that a rate hike next week is essentially a done deal.
Investors have now priced in a chance of nearly 90 percent that the Fed will raise U.S. interest rates this month, up from around a 30 percent chance early last week, according to CME Group's FedWatch tool.
The dollar index .DXY was last up 0.25 percent at 102.08, close to a March 2 peak of 102.26 which was a level not seen since Jan 11. The dollar rose to 114.74 yen, its highest against the Japanese currency since March 3, just below a nearly one-month high.
The euro EUR= also fell to its lowest since March 3 as investors looked to the conclusion of the European Central Bank's March meeting on Thursday.
There is little expectation that ECB President Mario Draghi will announce changes to the bank's ultra-loose monetary policy despite rising inflationary pressures.
"Draghi’s hands are relatively tied," Popplewell said. "He cannot be too aggressive or hawkish, despite inflation ticking up towards their desired levels, hence why the euro is basically trading in a tight range."
However, a Reuters poll last week found economists expect the ECB could signal a policy shift toward the end of this year or early next year.
The dollar rose by nearly 2 percent against the Turkish lira TRY= after Turkey's central bank governor did not give a clearer signal on rates during a conference, disappointing investors. The dollar last traded at 3.749 lira.
(Reporting by Dion Rabouin; Additional reporting by Jemima Kelly in London; Editing by Chizu Nomiyama)