Dollar rallies on stronger-than-expected data

NEW YORK (Reuters) - The dollar rose against major currencies on Friday after stronger-than-expected economic data reinforced the view the United States was recovering from recession faster than other developed countries.

The euro fell below $1.39 to a 6-1/2-month low as investors remained concerned about the fiscal health of some of the smaller euro zone countries including Greece and Portugal.

Data showed the U.S. economy grew at a 5.7 percent annual rate in the fourth quarter, its quickest pace in more than six years. Separate reports showed business activity in the U.S. Midwest expanded more than expected, while consumer sentiment hit a two-year high.

Such data raises expectations the U.S. Federal Reserve could hike interest rates before the European Central Bank. That encourages investors to move into dollar-based assets that would benefit from higher U.S. borrowing costs.

“The market is looking at this as a sign of U.S. resilience and contrasting it with signs of weakness in the euro zone and UK and even Asia,” said Brian Dolan, chief currency strategist at in Bedminster, New Jersey. “So that’s a reason the dollar is benefiting, and I’d have to reckon with a higher dollar in the coming weeks.”

In midday trading, the dollar rose 0.4 percent to 90.28 yen, after climbing to 90.92, the highest in about a week, according to Reuters data.

The euro traded at $1.3863, its lowest level since July 9, according to Reuters data, and 0.7 percent below its level late on Thursday.

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The euro was on track for a weekly loss of 2 percent against the dollar, its weakest performance in six weeks. In November, the euro hit a peak above $1.51.

Sterling fell 0.9 percent to $1.5987.

The European Union’s monetary affairs commissioner, Joaquin Almunia, said Friday an EU bailout for Greece was not possible, sparking a widening in the premium that investors demand to hold 10-year Greek government bonds rather than benchmark German bunds.

Despite Almunia’s comments, official support was still likely, said Credit Suisse currency strategist Ray Farris.

“If the Greeks fulfill their commitments, EU assistance will be easier to give. There is official support, but none of it is unconditional and the bulk of the heavy lifting has to be done by Greece,” he said.

Earlier, the euro tumbled to 1.4632 Swiss francs, its lowest level since last March, but later reversed course to hit a session high of $1.4762. Traders said the Bank of International Settlements was buying the euro, though the BIS declined to comment.

The BIS has acted on behalf of the Swiss National Bank in the past to weaken the franc. The SNB was not immediately available for comment.

A spike in risk aversion stemming from China’s increase of bank reserve ratios and the credit worries in the euro zone have helped boost the dollar in recent sessions.

At the World Economic Forum in Davos, top White House economic consultant Larry Summers said the dollar will have a central role to play in the international financial system for a long time to come.

Additional reporting by Steven C. Johnson and Vivianne Rodrigues; Editing by James Dalgleish