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NEW YORK (Reuters) - The U.S. dollar rallied against the euro and yen on Tuesday after stronger-than-expected U.S. economic data boosted expectations the Federal Reserve could reduce the pace of its bond purchases in coming months.
Benchmark U.S. 10-year Treasury yields rose to the highest in more than a year after the data. Higher U.S. interest rates would boost the appeal of dollar-denominated investments.
U.S. consumer confidence strengthened in May to the highest level in more than five years, a private-sector report showed on Tuesday. It followed data showing single-family home prices rose in March, racking up their best annual gain in nearly seven years.
"The main driver this morning is just the better-than-expected U.S. data," said Chris Tevere, senior currency strategist at Forex.com.
"We're seeing U.S. interest rates move substantially higher on this and we're seeing the dollar catch a bid pretty much across the board."
The euro fell 0.5 percent to $1.2869, having hit a session low of $1.2851 after the data, according to Reuters data.
The dollar rose 1.2 percent to 102.18 yen, after hitting a session high of 102.50 yen, rebounding from a two-week low of 100.68 set on Friday. The dollar rose to a 4-1/2-year high of 103.73 yen last Wednesday.
The yen tumbled broadly as global equity markets rallied on supportive comments from central bankers, encouraging investment in riskier, higher-yielding trades funded by cheap borrowing in the Japanese currency.
Japan's Nikkei stock average .N225 ended 1.2 percent higher, while European and U.S. shares rallied, reversing sharp losses seen last week after Fed Chairman Ben Bernanke stoked fears the U.S. central bank may scale back its stimulus.
Bank of Japan board member Ryuzo Miyao said on Tuesday it was vital to keep long- and short-term interest rates stable.
Also on Tuesday, European Central Bank Executive Board member Peter Praet said the bank could still cut interest rates further if needed, a day after ECB Executive Board member Joerg Asmussen said the loose policy would stay as long as necessary.
Strategists said markets were positioned for yen weakness on expectations of aggressive monetary easing by the Bank of Japan. They said the yen's reluctance to gain further in the face of equity selloffs late last week suggests its weakening trend remains intact.
"Perhaps the most interesting aspect of the price action is the degree to which dollar/yen is holding up, despite significant position reduction into the long weekend," said Jens Nordvig, global head of FX strategy at Nomura Securities.
"We are just 1.5 percent away from the highs in dollar/yen, even if the Nikkei is more than 10 percent off the highs. We are sticking with our long dollar/yen position with a stop at 100.50."
Lee Hardman, currency economist at Bank of Tokyo Mitsubishi, expects the dollar to touch 105 yen in 6 months and 109 yen in 12 months and sees any dips in the dollar towards the 100 yen level as an opportunity to buy the pair.
The euro rose 0.8 percent to 131.50 yen, pulling away from Thursday's trough of 129.94 yen, according to Reuters data.
The safe-haven Swiss franc fell, with the dollar up 1.1 percent at 0.9738 franc and the euro up 0.6 percent at 1.2533 francs.
Currencies such as the yen and the Swiss franc, which rose sharply last week after a recent sell-off in stock markets, typically gain in times of financial uncertainty.
The dollar index, which measures the greenback versus a basket of currencies, rose 0.5 percent to 84.126 .DXY.
The higher-yielding Australian and New Zealand dollars failed to benefit from the broad rally in the equity and commodity prices.
The Australian dollar was last at $0.9627, little changed on the day, while the New Zealand currency was slightly down at $0.8080. Analysts cited uncertainty about the outlook for the Chinese economy.
Editing by Chris Reese