Dollar rises as U.S. services data support rate-hike view

By Richard Leong

NEW YORK (Reuters) - The dollar rose against a basket of currencies on Wednesday as data showed the U.S. services sector expanded at its fastest pace in 10 years, supporting the view the Federal Reserve would raise interest rates in September.

The surprisingly strong reading on industries that account for more than two-thirds of the U.S. economy aligned with comments from Atlanta Fed chief Dennis Lockhart published on Tuesday. In an interview with the Wall Street Journal, Lockhart expressed support for the end of the Fed's near zero rate policy next month.

Lockhart is a voter on the U.S. central bank's policy-setting committee this year. His reputed centrist view is seen in line with Fed Chair Janet Yellen's.

"The direction of the ISM number is very encouraging for the dollar, although the number might be exaggerating the underlying strength of the U.S. economy," said Richard Franulovich, senior currency strategist at Westpac Banking Corp. in New York.

The dollar index climbed to a 3-1/2 month peak of 98.128 in overseas trading in the wake of the Lockhart interview. It was last up 0.15 percent at 98.083.

The greenback dialled back from its initial gains after Fed Governor Jerome Powell told CNBC television he has not decided on a rate 'lift-off' in September.

With further jobs gains seen critical for the U.S. central bank's decision to end its near zero interest rate policy, July private hiring figures from payrolls processor ADP briefly raised doubts about the strength of the government's jobs readings due Friday, analysts said.

ADP said U.S. companies hired 185,000 workers, the fewest since April.

The dollar's pullback was shortlived after the Institute for Supply Management said its services sector index rose to 60.3, its highest reading since August 2005.

One of the brightest aspects of the ISM report was the employment index which jumped to 59.6 last month, the highest since August 2005.

The dollar hit a two-month peak against the yen at 125.015 yen on the EBS trading system before retreating to 124.925 yen, up 0.4 percent from Tuesday.

The euro fell 0.2 percent at $1.08640 and touched a two-week low of $1.0847. It rose 0.3 percent to 135.680 yen .

The dollar also touched a 3-1/2 month high against the Swiss franc at 0.98215 francs on the ISM services data. It added to earlier gains after Switzerland slipped deeper into deflation, raising pressure on the Swiss National Bank to act next month.

(Additional reporting by Anirban Nag in London; Shinchi Saoshiro in Tokyo; Editing by Mark Heinrich and Andrew Hay)

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