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By Bloomberg

The dollar held gains versus major peers on prospects a strengthening labor market will back the Federal Reserve’s case for increasing interest rates this year.

The greenback reached its highest this week against the yen before the U.S. government’s June payrolls report due Thursday. The euro advanced as Greece signaled it was ready to compromise on ending a standoff over bailout aid. The Mediterranean nation will hold a referendum on creditors’ demands on Sunday. The dollar climbed to the highest level in five years against the kiwi as tumbling dairy prices spurred speculation New Zealand’s central bank will cut rates.

“A positive payrolls report will spur dollar buying and yen selling on rate hike expectations,” said Daisuke Karakama, chief market economist at Mizuho Bank Ltd. in Tokyo. “But I am a bit doubtful how much more the dollar can rise ahead of the Sunday vote.”

The greenback climbed 0.2 percent to 123.39 yen at 6:40 a.m. in London, after touching 123.46, the strongest since June 26. It fell 0.1 percent to $1.1069 per euro, paring the dollar’s 1.7 percent advance in the last two days.

“People, anticipating worse to come, are reducing their exposure to positions amid already high levels of euro shorts,” Karakama said. “This repeated positioning has resulted in the euro’s rise.”

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 of its major peers, was little changed at 1,189.24, after jumping 1.1 percent in the last two days.

U.S. financial markets will be closed Friday for a national holiday.

Scrutinizing Data

The Fed is scrutinizing incoming data for signs the world’s largest economy can withstand the first rate increase since 2006. Futures show a 36 percent chance policy makers will boost the benchmark rate in September and 73 percent odds by December, according to data compiled by Bloomberg.

A government report to be released Thursday will show employers increased nonfarm payrolls by 233,000 last month, according to a Bloomberg survey of economists.

“U.S. data is improving and pushing U.S. yields higher and making the dollar more attractive,” said Robert Rennie, global head of currency and commodity strategy at Westpac Banking Corp. in Sydney. “Concerns about Greece have faded from view for the moment while the world waits for the results of Sunday’s vote.”

Policy Divergence

A jump in U.S. Treasury yields Wednesday increased the allure of the dollar against the kiwi.

The U.S. currency advanced 0.5 percent to 66.93 cents per New Zealand’s dollar, after reaching 66.91, the strongest level since June 2010.

The Reserve Bank of New Zealand will likely cut its key rate by 25 basis points this month from 3.25 percent, followed by more reductions in September and March, ANZ Bank New Zealand Ltd. economists Cameron Bagrie and Con Williams wrote in a report dated July 2.

Policy easing will “keep the New Zealand dollar under pressure, with new five-year lows in prospect,” said Sam Tuck, ANZ Bank New Zealand’s Auckland-based senior currency strategist. The kiwi will decline to 66 cents this year, and may even tumble below that level, he said.