* Dollar falls, after touching August peaks against euro and yen
* Data on factory activity causes volatile swings in dollar
* Surprising drop in U.S. weekly jobless claims in focus
By Daniel Bases
NEW YORK, Aug 15 (Reuters) - The dollar fell broadly on Thursday after reversing earlier gains that sent it up against the euro and yen amid a cross-current of economic data that muddied the view on when the U.S. Federal Reserve will start trimming its stimulus measures.
A surprisingly sharp drop in initial U.S. weekly claims for jobless benefits to an almost six-year low and an inflation figure for July that was in line with expectations supported views that the Fed will begin shifting its policy stance sooner rather than later, driving the dollar higher.
But the dollar surrendered gains against the yen after data showed factory activity in the U.S. mid-Atlantic region weakened in August as new orders fell and the pace of hiring slowed.
At one point, the greenback reached a near two-week high of $1.3205 against the euro and 1-1/2-week peak against the yen, of 98.64 yen, before changing course.
The selloff “happened really on one trade in very thin market conditions. It was across the board against the U.S. dollar, not just the euro,” said Michael Woolfolk, global market strategist at BNY Mellon in New York.
Contributing to the greenback’s weakness was a general selling of U.S. Treasuries and a steep drop in U.S. equities.
“As a result of today’s initial jobless claims number, the Street is going to be marking up the expectations of a positive non-farm payrolls report in September,” Woolfolk said. “So that could seal the deal really on a September taper. That is of course being viewed as negative for bonds,” and therefore negative for the dollar on a flow of funds basis.
The Federal Reserve’s next policy meeting, on Sept. 17-18, will come after the government release of data on the labor market for the month of August.
Yields on U.S. Treasuries, which move inversely to price, rose. The benchmark 10-year Treasury yield was hovering just under a two-year high of 2.823 percent reached earlier in the day.
Higher U.S. yields raise the attractiveness of dollar-denominated assets in the long-run, but for now there has been an unprecedented bloodletting by foreigners selling U.S. Treasuries in anticipation of a slowdown in purchases made by the Fed to help spur economic growth.
Foreign investors sold $66.9 billion in long-term U.S. securities for a fifth consecutive month in June, out of which they dumped $40.8 billion in U.S. Treasuries alone.
The euro rebounded to trade at $1.3348, up 0.70 percent. Against the yen, the greenback hovered around 97.22 yen, down 0.93 percent. At its weakest point of the day the dollar was down more than 1 percent against the Japanese currency at 97.09.
The greenback’s fortunes have been tied for months to expectations of when the U.S. central bank will start to taper its monthly asset purchases from the current $85 billion. It slid more than 4 percent against a basket of major currencies between July 9 and Aug. 8, and has risen since then.
Remarks by the president of the St. Louis Fed, James Bullard, late on Wednesday added to the uncertainty, with Bullard saying he had not made up his mind if next month’s policy meeting would be too soon to start curbing bond buying, as he was wary of being too aggressive.
“This sort of broad two-way bouncing around in the dollar is what we are going to see in the near term, until the market has some certainty on Fed tapering, and that probably won’t come until the Fed actually announces it,” said Adam Cole, global head of FX strategy at RBC Capital Markets in London.
U.S. consumer prices rose as expected in July, which could comfort Fed officials worried about low inflation as they weigh trimming the central bank’s massive bond-buying program. One sticking point for Fed policymakers had been the level of U.S. inflation, which is below the Fed’s target.