NEW YORK, June 5 (Reuters) - The dollar fell on Monday on news that the U.S. services sector barely grew in May as new orders slowed, ending an initial rally sparked by strong jobs growth.
The Institute for Supply Management (ISM) said its non-manufacturing PMI fell to 50.3 last month from 51.9 in April. A reading above 50 indicates growth in the services industry, which accounts for more than two-thirds of the economy.
Economists polled by Reuters had forecast the non-manufacturing PMI edging up to 52.2.
The data indicates that the more accurate signal from the jobs report "might have been from the uptick in the unemployment rate rather than the solid increase in payroll employment," Bill Adams, chief economist for Comerica Bank said in a note.
Data on Friday showed U.S. job growth accelerated by 339,000 jobs in May, but a surge in the unemployment to a seven-month high of 3.7% suggested an easing labor market.
The dollar had risen after the better-than-expected jobs gains boosted expectations the Federal Reserve may continue hiking rates as inflation remains elevated.
"Job gains continue to surprise meaningfully to the top side, the labor market continues to be very strong," said Brian Daingerfield, head of G10 FX strategy at NatWest Markets in Stamford, Connecticut.
The dollar index fell to 104.00, down 0.13% on the day, after climbing as high as 104.40. It is holding just below a 11-week high of 104.70 reached on May 31.
The euro was last up 0.07% at $1.0712, just above $1.0635 on May 31, which was the lowest since March 20.
The greenback fell 0.27% to 139.60 yen . It reached 140.93 on May 30, the highest since Nov. 23.
The U.S. central bank is viewed as most likely to leave rates unchanged in June, but fed funds futures traders are pricing in a 65% likelihood of at least an additional 25 basis points rate hike by July, according to the CME Group's FedWatch tool.
Fed officials including vice chair nominee Philip Jefferson have stressed that any Fed decision to hold its benchmark overnight interest rate steady at an upcoming meeting should not be taken to mean the U.S. central bank is done tightening monetary policy.
"You could think of a skip as maybe part of the slowing of the tightening cycle rather than a pause in the tightening cycle," said Daingerfield.
Fed officials are now in a blackout period before the June 13-14 meeting. Consumer price inflation data for May due on June 13 is the next major U.S. economic release.
The Aussie dollar edged higher before the Reserve Bank of Australia (RBA) is due to announce its interest rate decision on Tuesday.
Wells Fargo analysts Erik Nelson and Jack Boswell on Monday recommended buying the Australian currency against the U.S. dollar and British pound on the view that markets are underestimating the likelihood of a rate hike.
"Market pricing for the RBA looks far too low in our view, both outright and relative to peers," they said. "We expect the RBA to hike tomorrow and guide for more, leading to a ~25-bp upgrade to terminal rate pricing and a sharp AUD rally."
Currency bid prices at 3:01PM (1901 GMT)
Additional reporting by Iain Withers in London; Editing by Kirsten Donovan and Richard Chang
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