By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – The dollar rose to a three-week high on Thursday, bolstered by stronger-than-expected U.S. jobs data that suggested an improving labor market and reinforced signs that the world’s largest economy was on its way to recovery from the COVID-19 pandemic.

The greenback, which was already on solid footing ahead of reports on jobless claims and private payrolls, climbed to three-week peaks against the euro and two-month highs versus the yen.

U.S. private payrolls increased by 978,000 jobs in May, the ADP National Employment Report showed, the biggest increase since June 2020. Economists polled by Reuters had forecast private payrolls would increase by 650,000 jobs.

At the same time, U.S. initial jobless claims dropped below 400,000 last week for the first time since the pandemic started more than a year ago.

“You have to give the U.S. dollar merit because the economy behind it seems to be coming out of the pandemic mode and now indicators are giving us signs of clear momentum,” said Juan Perez, FX strategist and trader at Tempus Inc in Washington.

Traders also awaited U.S. nonfarm payrolls report for May, due on Friday, which could set the tone at the Federal Reserve meeting this month. The Wall Street economists’ consensus forecast for U.S. non-farm payrolls was for 650,000 new U.S. jobs last month.

“The state of the U.S. labor market remains more uncertain and volatile than usual as it emerges from the unprecedented disruption of the COVID pandemic,” Matt Weller, global head of market research at FOREX.com and City Index, said in a research note.

“The month-to-month fluctuations in this report are notoriously difficult to predict, so we wouldn’t put too much stock into any forecasts,” Weller added.

In afternoon trading, the dollar index, which measures the greenback against a basket of six currencies, rose 0.7% to 90.5040. It hit a three-week high of 90.554 and found strong support around the 89.946 mark in recent sessions after falling 2% in April and a further 1.6% in May.

The euro, meanwhile, fell 0.7% against the dollar to $1.2123 after earlier sliding to three-week low of $1.2118.

Against the yen, the dollar gained 0.6% to 110.245 yen. Earlier, the greenback advanced to two-month highs of 110.315 yen.

The Fed is also starting to unwind some of its asset purchases, which some analysts said is a likely precursor to the central bank eventually tapering its quantitative easing.

On Thursday, the New York Fed said it would start to gradually sell its portfolio of exchange-traded funds that invest in corporate bonds on June 7, the first step in unwinding corporate bond holdings acquired during the pandemic.

In other currency news, Russia announced it would completely remove U.S. dollar assets from its National Wealth Fund (NWF), while increasing the share of the euro, Chinese yuan and gold, according to Finance Minister Anton Siluanov on Thursday. The changes are expected within a month.

The move did not have any immediate impact on currencies.

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Ritvik Carvalho in London; Editing by Kirsten Donovan, Will Dunham, David Holmes and Jonathan Oatis)

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