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By Simon Falush
LONDON, Dec 5 (Reuters) - The dollar climbed against a basket of major currencies on Wednesday as rising equity markets gave investors the excuse to take profits after two days of selling the U.S. currency.
Stock markets were cheered by prospects of further consolidation in the mining sector, with the FTSEurofirst index gaining 0.7 percent . This in turn weighed on the yen <JPY=>, which has shown a strong negative correlation with movements in equities in past weeks.
"There was a distinct sense of slight optimism which has fed through to the yen being under pressure," said Simon Derrick, head of currency research at Bank of New York Mellon.
The dollar was also supported by a comments from the UAE central bank governor Sultan Nasser al-Suweidi who said it would not change its dollar peg policy "for the foreseeable future" [ID:nL05356432].
Suweidi had previously bolstered market expectations of a Gulf Arab currency policy shift when he said last month that he was under pressure to scrap a peg to the tumbling dollar.
However Derrick said that this dollar-positive sentiment is fragile and moves have been exaggerated by a lack of liquidity.
"Investors have remained on the sidelines ahead of rate decisions tomorrow (from the European Central Bank and Bank of England) and (U.S> non-farm payrolls (data) on Friday."
The dollar rose 0.5 percent to 110.26 yen <JPY=> as short-term players took profits on the yen's rise from the previous two days -- a move which had been fuelled by worsening credit market conditions before the usually illiquid year-end.
The dollar index, which measures the dollar's value against a basket of six major currencies, rose 0.5 percent to 76.020 .DXY.
Sterling fell to a 4-1/2 year low versus the euro of 72.32 pence <EURGBP=> after weaker than expected service sector and house price data increased expectations that the Bank of England will cut interest rates on Thursday to 5.5 percent.
The euro was up 0.1 percent to 162.70 yen <EURJPY=>.
The euro fell 0.35 percent to $1.4713 <EUR=>, erasing around half of the previous session's gains.
The Australian dollar <AUD=> fell after the Reserve Bank of Australia kept interest rates at 6.75 percent as expected, but said global growth could ease in 2008.
U.S. interest rate futures FEDWATCH are pricing in a roughly 50 percent chance of the Federal Reserve cutting rates by a half percentage point to 4.0 percent at next Tuesday's meeting, with a 25 basis point cut fully priced in.
The market's immediate focus is on Wednesday's U.S. November private sector employment data from ADP, which will affect expectations for the U.S. Labor Department's monthly employment report due on Friday.
Economists expect the ADP report to show jobs growth of 50,000, down from 106,000 in October.
"The U.S. employment picture may go a long way in determining Fed's policy choice which is why today's ADP report could be the key to whether the dollar will strengthen or weaken in the North American session," said Forex Capital Markets in a note to clients.
"A print of less than 50,000 in the ADP estimate could prompt further dollar selling as traders will begin to anticipate a possible 50 basis point cut form the Fed."