Dollar rises to six-week high after stronger U.S. data

NEW YORK Tue Sep 3, 2013 3:39pm EDT

1 of 2. A picture illustration shows U.S. 100 dollar bank notes taken in Tokyo August 2, 2011.

Credit: Reuters/Yuriko Nakao

NEW YORK (Reuters) - The dollar rose to a six-week high against major currencies on Tuesday after stronger-than-expected U.S. economic data bolstered expectations the Federal Reserve will start scaling back stimulus this month.

Currencies held in tight ranges ahead of central bank policy meetings in major economies this week and as investors weighed the prospect of a Western strike against Syria.

The U.S. manufacturing sector grew last month at its fastest pace in more than two years while construction spending rose in July, data showed on Tuesday, suggesting recovery in the world's biggest economy was gaining traction.

The data strengthened the case for a reduction in the Fed's $85 billion-a-month bond buying program and lifted U.S. Treasury yields. Higher bond yields would boost the appeal of dollar-denominated assets, though some analysts said further gains in the dollar could be limited.

"It is tempting to extrapolate U.S. dollar gains. But overall the data has been mixed in the U.S.," said Jens Nordvig, global head of currency strategy at Nomura bank in New York.

"The bean-count for U.S. third-quarter GDP so far is tracking below 2 percent. Hence, it is hard to make the bet on a data-driven U.S. dollar break-out."

Uncertainty about the timing of Fed action has grown after recent disappointing readings on U.S. housing and durable goods orders.

The dollar index, which measures the greenback against a basket of six major currencies, hit a high of 82.516, its highest since July 22. It last traded at 82.342 .DXY, up 0.3 percent.

Central banks in the euro zone, UK, Canada and Japan all meet this week. The Fed meets on September 17-18 and before that, the August employment report will be released on Friday. A stronger-than-expected reading would cement expectations that the Fed will announce plans to trim its stimulus.

Contrasting monetary stances of the Fed and other central banks have driven the dollar up more than 3 percent against major currencies so far this year.

The euro fell 0.2 percent to $1.3170, weighed by expectations the ECB this week will reiterate its pledge to keep interest rates low to support a nascent recovery. It had fallen as low as $1.3137, according to Reuters data, its lowest since July 22.

"Investors do not want to be long euros heading into the ECB meeting this Thursday," said Geoffrey Yu, currency strategist at UBS. "We haven't heard for a while from Draghi. We expect him to say conditions remain soft despite an improvement in the data and pledge to keep rates low."

Against the yen, the euro was little changed at 131.06 yen, while the dollar gained 0.2 percent to 99.50 yen.

The safe-haven yen briefly rose on a media report that Russian radar detected two ballistic "objects" that were fired toward the eastern Mediterranean, but it gave up those gains after Israel's defense minister said that Israel had tested a U.S.-backed missile system in the Mediterranean.

"The reaction does speak volumes about the nervousness of the markets as traders await the escalation of conflict with trepidation," said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management in New York.

U.S. President Barack Obama won the backing of two top Republicans in Congress in his call for limited U.S. strikes on Syria to punish President Bashar al-Assad for his suspected use of chemical weapons against civilians.

Reflecting investor nervousness, one-month euro/dollar implied volatility, a gauge of expected price swings and derived from option prices, has risen to 1-1/2-month highs of around 8.6 percent.

(Additional reporting by Julie Haviv; Editing by James Dalgleish)

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