* Strong Empire State and PPI data helps dollar rally
* Yen weakens, Australian dollar also suffers
* Canadian dollar hits fresh four-year low against dollar
By Curtis Skinner
New York, Jan 15 (Reuters) - The dollar index gained for a second straight day on Wednesday, helped by strong U.S. regional manufacturing and price data that lifted the greenback further from a one-month low against the yen and sent the Canadian dollar to a fresh four-year low.
The dollar was up 0.5 percent against a basket of currencies to 81.104. It rose 0.3 percent to 104.560 yen, building on Tuesday’s recovery, when it rallied more than 1 percent.
“The data that we’ve since the payrolls report since Friday has been quite positive, and I think suggests that Friday’s payrolls report was more of an outlier or aberration than any signal that we’re seeing a broad slowdown of the U.S. economy,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange.
The euro was down 0.7 percent against the dollar at $1.3580 , hitting a session low after U.S. producer prices recorded their largest increase in six months in December. Core U.S. producer prices, which exclude volatile food and energy costs, are up 1.4 percent on a year-over-year basis, a still benign level of wholesale pressure.
Still, the data was enough to cause bond prices to fall, pushing U.S. Treasury yields higher. Rising yields often results in gains in the dollar index.
A separate report showed manufacturing activity in New York state jumped to its highest level in 20 months in January. The data modestly raised expectations that inflation may start picking up and potentially bring forward the timeline in which the Federal Reserve will start raising rates.
Also helping underpin the dollar, two of the Federal Reserve’s most hawkish policymakers who take up voting power this year said Tuesday the central bank should bring its bond-buying program to a swift close.
Investors quickly brought forward the likely timing of the first Fed rate hike to August 2015 , having only just pushed it out towards the back end of 2015 in the wake of Friday’s jobs numbers.
By contrast, the Bank of Japan is expected to continue pumping in trillions of yen to help the economic recovery while the European Central Bank is still grappling with falling inflation and has pledged to keep rates low for longer.
But with the ECB’s balance sheet still contracting as banks repay cheap loans availed of earlier, the euro’s losses against the dollar are likely to be muted, analysts said. Repayment of these loans causes excess liquidity in the euro zone banking system to shrink and pushes up short-term money market rates.
The dollar continued its climb and hit a fresh four-year high against its Canadian counterpart of C$1.0991. The greenback was last up 0.1 percent to C$1.0953.
The euro also peaked near its four-year high against the Canadian dollar at C$1.4892, with the latter under broad pressure after recent weak data raised concerns about whether the Bank of Canada may sound more dovish next week.
The single currency steadily dropped in morning trading, though, as investors fret over tomorrow’s data release.
“For the Euro side of the equation, there’s a tremendous risk in the Euro CPI. Should that disappoint tomorrow, that puts the ECB in an awkward position,” said Camilla Sutton, chief currency strategist at Scotiabank.
The single currency was last down 0.7 percent to C$1.4880, according to Reuters data.