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Dollar index at 4-month high on strong U.S. data, Fed hike hopes

[July 20, 2016] By Anirban Nag

LONDON (Reuters) - The dollar hit a four-month high against a basket of currencies on Wednesday, bolstered by strong U.S. data and growing expectations that the Federal Reserve may raise rates before the end of the year.

Commerce Department data showed U.S. housing starts surged 4.8 percent, underpinning a theme of strength in the economy.

Fed funds futures rates point to investors seeing around a 40 percent chance the Fed will raise interest rates by its December meeting, according to CME Group's FedWatch tool, compared with less than 20 percent a few weeks ago. Expectations of a Fed hike come as other major central banks around the world gear up to ease monetary policy.

The dollar index, which tracks the currency against a basket of six major rivals, hit a peak of 97.323 <.DXY> in European trade, its highest level since March 10. It was last trading at 97.104, a tad higher on the day.

The dollar rose 0.5 percent against the yen to 106.715 yen <JPY=>, its highest level since June 24, when markets were shaken by Britain's surprise vote to exit the European Union.

"The dollar is now being supported by rising U.S. rate expectations. The likelihood of a Fed rate hike before the end of the year that is being priced in by the markets has almost returned to the levels seen before the EU referendum," said Thu Lan Nguyen, currency strategist at Commerzbank.

"Most recently the rising rate hike expectations are mainly due to better economic and inflation developments in the US."

Speculators have also been unwinding their safe-haven bids in the yen as the initial shocks from the Brexit vote dissipated, and expectations rose of additional easing from the Bank of Japan at its July 28-29 meeting.

A majority of economists polled by Reuters expect further BOJ easing.

Japanese policymakers are unlikely to go as far as funding government spending through direct debt monetisation, dubbed "helicopter money", but might pursue a mix of aggressive fiscal and monetary expansion to battle deflation, according to sources.

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Euro, Hong Kong dollar, U.S. dollar, Japanese yen, British pound and Chinese 100-yuan banknotes are seen in a picture illustration shot January 21, 2016. REUTERS/Jason Lee/Illustration/File Photo

The dollar's rise saw the euro <EUR=> fall to $1.10980, its lowest since June 27. The European Central Bank will hold a regular policy meeting on Thursday, its last before an eight-week break. It is not expected to take any additional easing steps but could take a dovish line given the uncertainty from Brexit.

"The ECB governing council is unlikely to say anything supportive of the currency at its Thursday meeting," said John Hardy, head of currency strategy at Saxo Bank.

Meanwhile, sterling outperformed, rising 0.5 percent to $1.3175 <GBP=D4> after a Bank of England survey showed no clear evidence of a slowing of economic activity after last month's Brexit vote. [GBP/]

(Editing by Keith Weir and John Stonestreet)

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