FOREX-Dollar near 4-mth high as data lifts sentiment, euro wary of ECB

Reuters

* Dollar index rises to highs last seen in mid-February

* Soft German inflation cements expectations of ECB action this week

* Rand wobbles near 2-month trough versus dollar (Updates quotes, prices)

By Ian Chua and Shinichi Saoshiro

SYDNEY/TOKYO, June 3 (Reuters) - The dollar hovered near a four-month high against a basket of major currencies early on Tuesday, bolstered by upbeat U.S. data and taking advantage of a euro that is still in the doldrums ahead of a much-anticipated European Central Bank meeting later this week.

Trading was choppy overnight, reflecting some confusion after the U.S. Institute for Supply Management corrected its manufacturing activity index for May to 55.4, from a below-consensus reading of 53.2. The ISM said it had to make the correction due to an error in applying the seasonal adjustments.

Benchmark U.S. Treasury yields drifted back up as a result, helping boost the dollar's allure. The dollar index stood at 80.610, within close reach of Monday's four-month high at 80.681.

"The rally, if you can call it that, was interrupted for a time when the initial release of the U.S. Manufacturing ISM printed lower at 53.2, but a "woops" moment ensued when a U.S.-based economist picked up an error," said David de Garis, senior economist at National Australia Bank in Sydney.

Against the yen, the greenback fetched 102.36, having risen 0.6 percent on Monday in its biggest one-day rise in over two months. The dollar also stood steady against the euro at $1.3602, near a 3-1/2 month trough of $1.3586 plumbed late last month.

Further weighing on the common currency was data showing annual inflation in Germany slowed to its weakest in years in May, raising the downside risk for the euro zone rate due later in the day.

Such an outcome should add pressure on the ECB, already fretting about a protracted period of low inflation, to act when it meets on Thursday. The ECB is widely expected to trim its refinancing rate, send its deposit rate into negative territory and launch a long-term refinancing operation targeted at businesses.

Among emerging market currencies the weakness of the South African rand continued to stand out. The rand, hit recently by weak data that has rekindled investor concerns about South Africa's economy, traded at 10.667 to the dollar, not far from a two-month low of 10.696 hit during Monday's 1 percent slide.

The currency has fallen sharply from a five-month peak of 10.272 scaled in mid-May.

"The rand had been overbought and the recent plunge is part of a normalisation process which could take it as far as 11 to the dollar," said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.

"When U.S. Treasury yields fell recently the rand was overbought as investor money sought out higher yields. Now that Treasury yields are rebounding, money is being pulled out - first from economies with shaky fundamentals like South Africa," Murata said.

The Australian dollar, knocked lower on Monday by weak local housing data, ceded ground against the greenback ahead of an interest rate decision by the Reserve Bank of Australia (RBA).

The RBA, which is expected to stand pat on policy, will announce its decision at 0430 GMT.

The Aussie was last at $0.9235, down from Monday's high of $0.9321.

(Editing by Eric Meijer)

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