Dollar strengthens on diverging Fed, ECB monetary policy

By Sam Forgione

NEW YORK (Reuters) - The U.S. dollar strengthened against a basket of major currencies on Monday on the view that the Federal Reserve was still on track to hike U.S. interest rates this year while the European Central Bank may ease monetary policy further.

ECB Chief Economist Peter Praet reiterated the bank's readiness to modify its trillion-euro bond-buying programme should economic turbulence merit action in an interview in a Swiss newspaper.

St. Louis Fed President James Bullard, meanwhile, told CNBC television on Monday there is "a powerful case to be made" for the Fed to begin to tighten policy after nearly seven years of rock-bottom borrowing costs.

Atlanta Fed President Dennis Lockhart also said Monday that he still expects the Fed to hike rates this year. Bullard and Lockhart's comments supported views the Fed would tighten policy this year after leaving rates unchanged last week. [ID:nW1N11F03M]

The comments came after San Francisco Fed President John Williams said on Saturday that a 2015 U.S. rate hike was still likely. [ID:nL1N11P0GH]

"The Fed's talking a little bit more hawkish, the ECB's talking a little more dovish," said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange in New York.

The euro hit $1.11820, its lowest against the dollar in a week and a half.

The comments by Fed officials by and Praet reinforced the view of diverging monetary policy between the Fed, which is on track to hike rates, and the ECB and the Bank of Japan, which have kept policy loose. A Fed hike is expected to boost the dollar by driving investment flows into the United States.

"The recovery in the dollar across the board more realistically reflects rate hike prospects," said Richard Franulovich, senior currency strategist at Westpac in New York.

Analysts said a Fed hike would have supported the European economy by weakening the euro against the dollar, and the fact that the Fed decided to hold put more pressure on the ECB to ease further.

ECB President Mario Draghi will speak on Wednesday, while Fed Chair Janet Yellen will speak on Thursday.

The euro was last down 0.95 percent against the dollar at $1.11925. The greenback was up 0.49 percent against the Japanese yen at 120.560 yen. The dollar was up 0.26 percent against the Swiss franc at 0.97130 franc .

The dollar index, which measures the greenback against a basket of six major currencies, was last up 1.08 percent at 95.882 .

(Additional reporting by Anirban Nag in London; Editing by Jeffrey Benkoe and James Dalgleish)