Dollar gains against yen on U.S. data; euro lower in run-up to ECB

By Sam Forgione

NEW YORK (Reuters) - The U.S. dollar rebounded against the yen and hit one-month highs against the euro on Tuesday after traders saw the yen's rally as overextended, while strong U.S. manufacturing data supported views of higher U.S. interest rates.

The greenback rose more than 1 percent against the yen, to 114.18 yen, its highest level since Feb. 18, reversing Monday's drop against the Japanese currency and putting the dollar on track for its biggest daily percentage gain against the yen in more than a month.

The dollar in February posted its biggest monthly decline against the yen since 2008. Analysts said the potential for more Bank of Japan stimulus, combined with increasing expectations for at least one Federal Reserve rate increase this year after Tuesday's U.S. manufacturing data, pushed the dollar higher.

The Institute for Supply Management reported its index of national factory activity rose to 49.5 in February from 48.2 the previous month, beating expectations of 48.5 from a Reuters poll of economists. A reading below 50 indicates contraction.

"What this tells me right here is that the yen longs were a little bit overdone," said Ihab Salib, head of international fixed income at Federated Investors in Pittsburgh. "Maybe this was the one straw that broke the camel's back," he said of the manufacturing data.

The euro hit a one-month low against the dollar, at $1.0835. Analysts said traders were selling the euro ahead of the European Central Bank's upcoming policy meeting on March 10, when the bank is expected to announce more stimulus.

"We're going to continue to see (stimulus) policies coming out of the ECB and the BoJ," said Thierry Albert Wizman, global interest rates and currencies strategist at Macquarie Limited in New York.

The euro has been losing ground since peaking at $1.1375 on Feb. 11, which was its highest level since Oct. 21.

The euro pared most of its losses after hitting one-month lows, however, which Federated's Salib attributed to concern that the ECB could disappoint expectations for a greater stimulus plan.

The dollar index, which measures the greenback against a basket of six major rivals, was last up 0.15 percent, at 98.359, after hitting a nearly one-month high of 98.570 .

The dollar was last up 1.22 percent against the yen , at 114.03 yen. The euro was last down 0.08 percent against the dollar, at $1.0862, while the dollar was down 0.07 percent against the Swiss franc, at 0.9971 franc .

(Reporting by Sam Forgione; Additional reporting by Anirban Nag in London; Editing by Dan Grebler and Leslie Adler)