* Dollar index marks new 10-1/2-month peak
* Euro drops to fresh nine-month low vs U.S. dollar
* Greenback hits three-month peak against Canadian dollar
* Swedish crown, sterling jump after high PMI readings (Adds Polish Foreign Minister comment on Ukraine, updates prices)
By Daniel Bases
NEW YORK, Aug 5 (Reuters) - The U.S. dollar extended a broad-based rally on Tuesday after stronger-than-expected economic data, including an 8-1/2-year high in the pace of services sector growth and a bigger-than-expected increase in factory orders.
However, some gains were trimmed back, especially against the yen after reports emerged that Russia had gathered military forces on its border with Ukraine. “These things are being done just to exert pressure. Or to enter,” Polish Foreign Minister Radoslaw Sikorski told broadcaster TVN24.
Earlier, European service sector data growth was undermined by a drop in Italy, underlining the fragile outlook for the region. This builds expectations the European Central Bank will pump yet more euros into the financial system to boost growth.
“Generally the dollar started off on a stronger footing this morning and certainly the strengthening of the data has helped that rally,” said Brian Daingerfield, currency strategist at the Royal Bank of Scotland in Stamford, Connecticut.
The euro hit a nine-month low of $1.3359, before rebounding to $1.3375, still off 0.34 percent. The U.S. dollar index, which measures the greenback against a basket of major currencies, hovered near a fresh 10-1/2-month high of 81.626 .
The dollar traded unchanged versus the yen at 102.58 yen . Reports of the Russian troop buildup sent investors toward the yen, seen as a low-yielding safe-haven currency.
The Institute for Supply Management said its services index rose to 58.7 last month, the highest since December 2005 and above forecasts. A reading above 50 indicates expansion in the sector. The Commerce Department report showed new orders for manufactured goods rose 1.1 percent in June after a downwardly revised 0.6 percent decline in May.
While the Italian numbers were disappointing, a surprise bounce for equivalent data in Sweden and Britain lifted the crown and the pound.
Sweden has been symbolic of Europe’s flirtation with very low inflation, or even falling prices, this year, but its services PMI for July shocked by surging to 60.1 from 54.6 a month earlier. The euro fell 0.35 percent to 9.2075 Swedish crowns.
“The momentum has been good in Sweden in recent months and if inflation does begin to pick up as the Riksbank expects then we may get back to seeing some upward potential later this year,” said Citigroup strategist Josh O‘Byrne.
Sterling’s gains against the greenback slipped after the U.S. data. The Bank of England is not expected to change monetary policy after its meeting concludes this week.
Cable was up 0.08 percent at $1.6874. The greenback hit a three-month high against the Canadian dollar of C$1.0976. The Australian dollar was little changed after the Reserve Bank of Australia left interest rates unchanged at a record low of 2.5 percent. (Additional reporting by Patrick Graham in London, Ian Chua in Sydney and Masayuki Kitano in Singapore; Editing by Chris Reese and James Dalgleish)