Dollar rallies on data, Europe woes; stocks, commods fall

By Rodrigo Campos

NEW YORK (Reuters) - The U.S. dollar rallied on Tuesday after a string of healthy economic data boosted near-term rate hike prospects, while Greece's financial crisis and signs of growing opposition to austerity in Spain weighed further on the euro.

Stocks and commodities took a knock as the greenback pushed higher, boosted by a solid increase in a gauge of U.S. business investment spending in April.

Other reports showed U.S. consumer confidence improved this month and house prices extended gains in March, which should boost household equity, support consumer spending, and allow the Federal Reserve to move ahead in its plan to raise interest rates later this year.

Markets in the United States as well as London and Frankfurt returned to action after a long holiday weekend, with the mood in Europe unsettled as voters in Spain punished the ruling Popular Party after years of austerity policies. Greece, which has warned it may miss a June 5 debt repayment to the International Monetary Fund, also concerned markets.

Stocks opened lower on Wall Street weighed by the stronger dollar, which gained as much as 1.38 percent against a basket of major currencies, pushing for its largest daily move in almost two years.

"It isn't normal to see such large moves in currencies," said Adam Sarhan, chief executive of Sarhan Capital in New York.

"Such moves heighten volatility in the (equities) market."

The Dow Jones industrial average fell 202.33 points, or 1.11 percent, to 18,029.69, the S&P 500 lost 22.07 points, or 1.04 percent, to 2,103.99 and the Nasdaq Composite dropped 64.44 points, or 1.27 percent, to 5,024.93.

The pan-European FTSEurofirst 300 index and the euro zone's blue-chip Euro STOXX 50 index both were down near 0.7 percent.

However, a senior German official who spoke on condition of anonymity said on Tuesday there were some "encouraging" signs from talks with Greece and doubted it would default on the June 5 IMF payment.

The dollar's move to a one-month high against its currency basket extended a rally triggered by Friday's robust inflation data and comments from Fed Chair Janet Yellen that she expected the economy to strengthen. Against the yen, the dollar topped 123 yen to a high of 123.32 yen, a level last seen in July 2007.

"I think this has turned around and the dollar is back on a bullish trend," said Ian Stannard, head of European FX strategy with Morgan Stanley in London referring to the data.

"The adjustment has now been completed and the dollar can now react to any positive news. Dollar yen breaking through the top of the range is an important event."

Short-dated U.S. Treasury yields hit two-week highs on continued expectations that the Fed would hike rates this year, before flattening out on the day on the view that the Fed will not move too sharply.

"People just don't think the strength in the economy is there to sell off hard, the Fed's going to have to be extremely slow and gradual," said Justin Hoogendoorn, fixed income strategist at BMO Capital Markets in Chicago.

Two-year Treasury notes were last flat in price to yield 0.626 percent. Benchmark 10-year Treasury notes were last up 20/32 in price to yield 2.16 percent, from a yield of 2.229 percent late Friday.

U.S. 30-year prices were last up 1-22/32 to yield 2.915 percent, from a yield of 3 percent late Friday after hitting a low of 2.914 percent.

Commodity markets were pressured by the strength in the dollar. Spot silver fell 2 percent and spot gold lost 1.5 percent, while copper was down 0.6 percent.

Brent crude tumbled 2.7 percent to $63.76, further pressured by the possibility that U.S. shale oil producers could increase drilling activity.

(Reporting by Sam Forgione, Michael Connor, Tanya Agrawal; Editing by Meredith Mazzilli)