* U.S. private sector jobs data shows lower-than-expected increase
* U.S. services sector recovers in May
* Bank of Canada cuts rates by 25 basis points
* Focus on ECB meeting, U.S. nonfarm payrolls report

By Gertrude Chavez-Dreyfuss
       NEW YORK, June 5 (Reuters) - The U.S. dollar drifted higher on
Wednesday after data showed the services sector in the world's largest
economy rebounded in May after contracting the month before,
highlighting uncertainty surrounding the expected start of the Federal
Reserve's easing cycle later this year.
    The Institute for Supply Management said its nonmanufacturing
purchasing managers index rose to 53.8 last month from 49.4 in April.
May's reading, the highest since August, overshot estimates of a 50.8
    In afternoon trading, the dollar index was up 0.1% at 104.28
, after earlier hitting 103.99 on Tuesday, its lowest since
April 9.
    Even with the strong ISM services data, Vassili Serebriakov, FX
strategist at UBS in New York, said he believes the U.S. economy is
slowing down, although "it's not clear that you should outright sell
the dollar." 
        He said the market is pricing in about two rate cuts by the
Fed this year, so not leaving much room to price in more easing than
what has already been factored in by investors.
        "In that context, we are still not convinced that the dollar
has a lot of downside," Serebriakov said.  
    The euro, the biggest component of the dollar index, turned lower
after the ISM data, trading slightly down at $1.0874.
    Investors are now looking to the European Central Bank  meeting on
Thursday, in which the bank is widely expected to lower its deposit
rate from a record high of 4%. 
    Earlier in the session, the Bank of Canada (BOC) cut interest
rates by 25 basis points (bps) to 4.75%, its first cut in four years.
The bank said more easing was likely if inflation continued to
    The U.S. dollar rose against the Canadian currency after the BOC
rate move, and was last up 0.1% at C$1.3688.
    Analysts expect the Bank of England to emulate the ECB's and BOC's
moves when the British central bank convenes in two weeks to decide on
interest rates.
    The Swiss National Bank, meanwhile, already started easing in
March, and could cut rates again this month after Swiss inflation held
steady in May. 
    Earlier on Wednesday, data showed U.S. private payrolls increased
less than expected in May while data for the prior month was revised
    Private payrolls increased by 152,000 jobs last month after rising
by a downwardly revised 188,000 in April, the ADP Employment report
showed. Economists polled by Reuters had forecast private employment
rising 175,000 last month.
    The dollar showed little reaction to the ADP report.
    Aside from the ECB, investors are also looking to Friday's nonfarm
payrolls report, with the market expecting 185,000 new jobs created
last month, according to a Reuters poll.
    "The weak JOLTS (Job Openings and Labor Turnover Survey) data does
not pass the threshold of significant slowing in the labor market,
which is not going to affect rate expectations," said Marc Chandler,
chief market strategist, at Bannockburn Forex in New York. 
    Fed funds futures raised the chance of a rate cut in September to
70% on Wednesday, according to LSEG's rate probability app, compared
with 59% late Tuesday. It was slightly below 50% earlier last week.
        The rate future market is also pricing between one to two cuts
this year.     
    In other currency pairs, the dollar surged 0.8% against the yen to
156.09 yen. The Japanese currency retraced Tuesday's gains driven by
investors unwinding bets in emerging markets, after Japanese real
wages fell for a 25th straight month in April as inflation outpaces
nominal pay rises. 
    On Tuesday, Bank of Japan Deputy Governor Ryozo Himino said the
central bank must be "vigilant" about the impact of yen weakness on
the economy and inflation. Investors see the BOJ tightening its policy
in the future, though not enough to strengthen the yen.
    Emerging markets stabilised after a turbulent few days.
    The Mexican peso gained against the dollar, which fell 1.6%
to 17.567 pesos. The ruling left-wing Morena party was re-elected and,
in coalition, within reach of two-thirds majorities in both Congress
    India's rupee recovered from a seven-week low against the
dollar. Election results in India showed voters had returned Narendra
Modi to power by a much slimmer margin than expected. The dollar was
last down 0.2% versus the rupee at 83.370.
 prices at                                                        
 5 June                                                          
 p.m. GMT                                                         
 Descripti  RIC    Last      U.S.       Pct     YTD Pct  High     Low
 on                          Close      Change           Bid      Bid
 Dollar     <=USD  104.25    104.15     0.11%   2.84%    104.46   104.
 index      >                                                     12
 Euro/Doll                                                    855
 Dollar/Ye                                                     8
 Euro/Yen                                                     41
 Dollar/Sw                                                    98
 Sterling/                                                     855
 Dollar/Ca                                                     66
 Aussie/Do                                                     627
 Euro/Swis                                                    8
 NZ                                                            71
 Dollar/No                                                       31
 Euro/Norw                                                    549
 Dollar/Sw                                                       738
 Euro/Swed                                                    967
 (Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by
Stefano Rebaudo in Milan and Tom Westbrook in Singapore; Editing by
Bernadette Baum, Mark Potter and Deepa Babington)