By Richard Hubbard
LONDON (Reuters) - Conviction that economic recovery will persuade the Federal Reserve to trim its stimulus kept the dollar near a six-week high on Wednesday but shares dipped as Washington moved closer to a strike on Syria.
U.S. president Barack Obama clinched the backing of key figures in Congress on Thursday for his drive to punish Syrian President Bashar al-Assad for his suspected use of chemical weapons, though no vote is due until next week.
"There is an underlying vulnerability to any escalation of tension in the Middle East, but I think for the markets top of the agenda is the improvement in economic activity and the better risk back drop that leaves," said Adam Cole, head of FX Research at RBC Capital Markets.
The dollar was trading close to a six-week peak against a basket of major currencies supported by the rise in U.S. debt yields which gained after strong factory data raised expectations the Fed will soon begin trimming its bond buying.
The dollar's strength saw the euro slide to a six-week low of $1.3138, although it has since recovered to be little changed at $1.3170.
Policy meetings on Thursday at the Bank of Japan, the Bank of England and the European Central Bank were expected to weigh on major currency trading decisions, with investors also eyeing Friday's release of the latest U.S. numbers.
However, the underlying nervousness over development's in the Middle East did weigh on commodities and equity markets.
MSCI's world equity index, which tracks shares in 45 countries, was little changed overall but Europe's broad FTSE Euro first 300 index had dipped 0.2 percent in early trade.
Asian stocks earlier broke a four-day winning streak on the worries over Syria but were off their lows for the day. Although in Japan the Nikkei index finished at a four-week high after rising 0.5 percent.
The outlook for the global economy has been given a boost this week, not only by surge in manufacturing activity in the world's largest economy, but by unexpected strength at factories in China, the UK and across Europe.
On Wednesday new data revealed the pickup spreading to the all-important service sector with activity in China hitting its highest level for five months in August.
Euro zone businesses also recorded their best month in over two years in August as orders increased for the first time since mid-2011, a separate survey showed, suggesting the region's economy will grow slightly this quarter.
"The euro zone recovery is looking increasingly broad-based, with more sectors and more countries emerging from recession," said Chris Williamson, chief economist at data collator Markit.
Williamson said Markit's euro zone composite PMI, compiled from a survey of thousands of companies across the 17-nation bloc and viewed as a good gauge of growth, suggested the region's economy would grow 0.2 percent in the current quarter.
Meanwhile in the energy markets Brent crude traded above $115 a barrel as investors worried that any strike against Syria could spread unrest in the Middle East and disrupt supply from the region that pumps a third of the world's oil.
"The U.S. is likely to take some action in Syria," said Tetsu Emori, a commodity sales manager at Astmax Investments in Tokyo. "Oil prices should ratchet up."
Brent crude for October delivery LCOc1 was at $115.77, little changed for the day.
Some sporadic safe-have buying also allowed gold to hold to its recent gains to trade at $1,412.84 an ounce, after it pushed past $1,400 on Tuesday when missile test by Israeli forces training with the U.S. Navy set nerves on edge.
(Additional reporting by Florence Tan in Singapore.; Editing by Jeremy Gaunt)
- Budget, Tax & Economy
- Barack Obama