By Saqib Iqbal Ahmed

NEW YORK (Reuters) -The dollar pared losses against the euro after data showed U.S. business activity accelerated to the highest level in just over two years in May, suggesting that economic growth picked up half-way through the second quarter.

S&P Global said on Thursday that its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, jumped to 54.4 this month. That was the highest level since April 2022 and followed a final reading of 51.3 in April.

A reading above 50 indicates expansion in the private sector.

“The currency action shows the market still responds to strong U.S. economic data in the expected way,” said Marc Chandler, chief market strategist at Bannockburn Global Forex LLC.

“I think the dollar has some more room on the upside,” Chandler said.

Data on Thursday also showed the number of Americans filing new claims for unemployment benefits fell last week, pointing to underlying strength in the labour market that should continue to support the economy.

Federal Reserve officials at their last policy meeting said they still had faith that price pressures would ease at least slowly in coming months, but doubts emerged about whether the current level of interest rates was high enough to guarantee that outcome and “various” officials said they’d be willing to hike borrowing costs again if inflation surged.

“Given the FOMC comments the market is still exaggerating the chances of two rate cuts this year,” Chandler said, noting that the unwinding of rate cut bets would keep the dollar supported in the near term.

The euro was up 0.1% at $1.0835. The common currency rose as high as $1.0861 earlier in the session after the preliminary composite Purchasing Managers’ Index for the currency bloc came in above the 50 level separating growth from contraction for the third month in a row, with even struggling manufacturing showing a recovery.

Better than feared economic data for the past few months helped the euro rally in April and early May, and Thursday’s data pushed the currency back towards mid-May’s two-month high of $1.0895.

The pound was steady near a two-month high against the dollar at $1.2714, largely unmoved after Prime Minister Rishi Sunak on Wednesday called a national election, which his Conservatives are widely expected to lose to the opposition Labour Party after 14 years in power. However, sterling options volatility for the period covering the July 4 election did rise. [GBP/]

“The market is fairly confident there’s going to be a Labour government and it’s pretty confident also that the Labour government won’t be that different in terms of fiscal policy, than the current Sunak and (finance minister Jeremy) Hunt mix anyway,” said Jane Foley, head of FX strategy at Rabobank.

The dollar was 0.2% higher against the Japanese currency at 157.09 yen after data showed Japan’s factory activity crept into expansion for the first time in a year in May.

The corporate sector in Japan has been grappling with the weak yen, and nearly half of Japanese firms find the yen’s slide beyond 155 to the dollar harmful to their business, roughly double the percentage of those who see the currency’s weakness as a positive, a Reuters survey showed on Thursday.

The New Zealand dollar added 0.3% to $0.6115 after data released Thursday showed that retail sales volumes in New Zealand unexpectedly rose, its second day of gains after the Reserve Bank of New Zealand surprised markets on Wednesday by lifting its forecasts for peak interest rates and pushing back when it expects to cut. {AUD/]

Among cryptocurrencies, ether was up 2% at $3,807, its highest since mid-March.

It has been surging amid speculation over the potential approval of U.S. spot exchange-traded funds that would track the world’s second-biggest cryptocurrency.