Dollar clings to modest gains as strong U.S. data lends support

NEW YORK, Feb 21 (Reuters) - The dollar held on to modest gains against its peers on Tuesday, supported by strong U.S. economic data, but the greenback was down against the British pound.

Business activity in the United States in February unexpectedly rebounded to an eight-month high, increasing to 50.2 from a final reading of 46.8 in January, according to a survey. A PMI reading above 50 indicates expansion while a reading below that signals contraction.

It follows recent robust data on retail sales, the labor market and manufacturing production, suggesting solid momentum in the economy at the start of the year.

"Today’s PMI releases show a large portion of the U.S. economy is still proving more resilient than expected, particularly the services sector, but the housing market remains challenged as evidenced by the surprise decline in existing home sales," said Erik Nelson, macro strategist at Wells Fargo Securities in London.

Nelson noted a dichotomy between the leading indicators from the U.S. economy, showing a recession still looming and lagging indicators pointing to still-solid demand. This will likely keep the Fed cautious and raises the bar for more aggressive rate hikes, according to Nelson.

"A measured pace of Fed tightening should limit USD gains for now as the ECB and other central banks play a bit of catch up, with the more medium-term direction for USD likely to depend more on relative growth paths," he said.

The euro fell 0.34% to $1.0648, extending losses after data showed euro zone manufacturing activity deteriorated, although losses were limited after a rebound in the more inflation-sensitive services sector.

The British pound extended gains against the greenback, rising 0.56% to $1.2106 after data showed an unexpected bounce in British business activity, suggesting a smaller risk of recession.

The dollar index , which tracks the U.S. currency against six major peers, was at 104.16, or up 0.25%, rebounding from early declines to hover close to the day's high of 104.26.

"We're seeing consumers the world over that are less sensitive to interest rates than anticipated," said Adam Button, chief currency analysts at ForexLive in Toronto. "There's potentially a dream scenario unfolding where inflation comes down gently, and the consumer remains strong. It's almost foolish outlining a scenario like that, but so far, you couldn't have scripted a better start to 2023."


Currency bid prices at 2:59PM (1959 GMT)

Editing by David Gregorio

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