* Dollar index rises to 14-month highs
* Yen broadly weaker, sterling also under pressure
* Euro off lows ahead of ECB policy review
By Ian Chua
SYDNEY, Sept 3 (Reuters) - The dollar hovered at 14-month highs against a basket of major currencies early on Wednesday, underpinned by upbeat U.S. data and further supported by a selloff in the yen and sterling.
The dollar index rose as far as 83.039, reaching levels not seen since July 2013 after data showed manufacturing activity hit a near 3-1/2-year high last month and construction spending rebounded strongly in July.
“This only reinforces our bullish USD view premised on a relative pick-up in the U.S. economy, some more front-end rate support for the USD...as rates re-price to the Fed’s own forecasts,” analysts at JPMorgan wrote in a note to clients.
They added that other regional dynamics including low euro zone inflation and the risk of a more activist European Central Bank (ECB) further supported their upbeat dollar view.
U.S. two-year Treasury yields jumped to a one-month high of 0.528 percent in the wake of the data, which in turn helped the greenback race to an eight-month high on the yen at 105.22.
The dollar scaled a five-month perk on sterling, which skidded 0.8 percent to $1.6469 - its biggest one-day fall since late January. Commodity currencies such as the Australian and New Zealand dollars also lost ground against their U.S. peer.
But the euro, which briefly plumbed a one-year low of $1.3110, staged a modest recovery to $1.3135 led by a 0.8 percent rally in euro/yen.
The common currency hit a seven-week high of 138.10 yen , posting its biggest one-day rise in over five months as the Japanese currency crumbled.
The broad selloff in the yen coincided with renewed market chatter about the highly anticipated portfolio change in Japan’s behemoth public pension fund.
Due to be announced in the weeks ahead, the asset allocation overhaul is expected to see the fund move into riskier assets including stocks and foreign bonds.
The spike in intra-day volatility marked an end to the summer lull and should provide a welcome relief to traders.
But euro bulls are likely to tread cautiously as the ECB meeting looms, with the market still split on whether the bank will take more stimulus steps.
French President Francois Hollande and ECB chief Mario Draghi agreed on Monday that low inflation and weak growth were threatening the European Union’s economy, an official in the president’s office said.
Ahead of the ECB meeting, Australia’s second quarter gross domestic product; a speech by the head of Australia’s central bank; a survey on China’s services sector and the Bank of Canada’s (BOC) policy review will take centre stage.
Weak growth in business investment and exports, as well as concerns about the risks of low inflation are expected to keep the BOC stuck on the sidelines until the second half of next year, a Reuters poll found. (Editing by Eric Meijer)