* Dollar set for more gains on Fed outlook, economy
* Sterling hits four-month low vs dollar after weak UK data
* Euro flat; any bounce seen likely to fizzle out
By Anirban Nag
LONDON, July 9 The dollar rose towards recent
three-year highs against a basket of currencies on Tuesday, with
more investors betting on further gains as the Federal Reserve
prepares to reduce stimulus.
The dollar's biggest gains were against the British pound,
after weaker-than-expected UK data drove sterling close to a
three-year low and highlighted the divergence between UK and
U.S. monetary policy.
Expectations the Fed, which releases minutes of its June
meeting on Wednesday, will scale back its $85 billion-a-month in
asset purchases as early as September are encouraging investors
to buy dollars.
The dollar index, which measures the greenback
against a currency basket, was up 0.2 percent at 84.343, having
earlier hit 84.085 on a dip in U.S. Treasury yields.
It hit a three-year peak of 84.588 on Monday after an
upbeat U.S. jobs report on Friday
The euro was flat at $1.2860, holding above Friday's
seven-week trough of $1.2806. The single currency, which began
July above $1.30, found some support after Greece secured aid
that will prevent it from defaulting in August.
But with the European Central Bank set to keep rates at
record lows, the euro is likely to remain under pressure.
"This is momentum-driven trade and we are looking for more
dollar strength," said Mankash Jain, head of FX and Investment
Management at Solo Capital, London. "Any bounce in the euro
towards $1.2950 is a time to initiate fresh short positions."
Likewise, any modest decline in the dollar in coming days
"will provide a renewed buying opportunity as the overall
picture is positive for the dollar," said Ian Stannard, head of
European FX strategy at Morgan Stanley.
He said Wednesday's FOMC minutes would be scrutinised for
any hints to when monetary stimulus could be reduced.
Sterling hit four-month lows against the dollar and the euro
after weak factory output and trade data was seen as
raising the risk of the Bank of England easing monetary policy
in coming months.
Sterling fell 0.8 percent to $1.4832, its lowest since
mid-March. A drop below $1.4832 would take it to a three-year
"Short sterling/dollar remains a favoured trade and our view
has long been that US-UK growth differentials are a convincing
rationale for further downside," Commerzbank said in a note.
The dollar was up 0.3 percent against the yen as the Bank of
Japan is expected to maintain aggressive monetary stimulus when
it meets to decide on policy later this week.
The dollar rose 0.2 percent to 101.17 yen, off a
near six-week high of 101.54 yen hit on trading platform EBS on