* Strong ISM data will seal case for a U.S. rate hike next week
* Mexican peso leads losers on tariff war concerns
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Saikat Chatterjee
LONDON, June 5 (Reuters) - The dollar stabilised on Tuesday just below its six-month high of last week, as investors awaited data that might confirm the U.S. economy is on track for a strong June quarter with rising bond yields also supporting the greenback.
Short-dated U.S. Treasury yields are up by roughly 20 basis points in a week pushing two-year government yields to 2.50 percent and within kissing distance of a decade high of 2.59 percent hit last month.
With correlations between short-dated U.S. debt yields and the dollar strengthening to their strongest since January 2017, investors have responded by buying the greenback in recent days, especially against the euro and emerging market currencies.
“The dollar is perched around some important levels and its strength can be judged from the fact that the euro/dollar has failed to break above the $1.17 line despite falling Italian political concerns,” said Kenneth Broux, a strategist at Societe Generale in London.
The greenback was firm at 94.04 against a basket of rivals . It had climbed to 95.02 last week, its highest since early November 2017, and has risen more than 5 percent since mid-April.
The euro was broadly flat at $1.16930. Since hitting a 10-month low of $1.1510 a week ago, the common currency has recovered somewhat as investors took comfort from the formation of a coalition government in Rome.
The big spending plans of the two anti-establishment parties that make up the coalition have raised some concerns, but new Economy Minister Giovanni Tria has said that none of the parties wants to leave the euro zone and neither does he.
Strong U.S. employment data published on Friday has revived bets that the Federal Reserve will raise interest rates three more times this year. Market expectations are for another two rate hikes until December.
A strong reading on ISM non-manufacturing PMI for May will seal the case for another rate hike at its policy meeting next week, following up on a rate hike in March and might even prompt the Fed to strike a hawkish stance.
“The U.S. jobs data was really strong. The Fed could indicate it will raise rates four times this year, including an expected hike in June and one in March,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities in Tokyo.
The Mexican peso led losers in emerging markets against the dollar on Tuesday as trade war concerns rose. Mexico said it will impose a 20 percent tariff on U.S. pork imports after U.S. President Donald Trump slapped tariffs on steel and aluminium. (Reporting by Saikat Chatterjee Additional reporting by Hideyuki Sano in TOKYO Editing by Peter Graff)