* Euro zone PMI data comes in below forecasts
* Strong U.S. economic data supports dollar
* Dollar turns positive against yen, franc
By Sam Forgione
NEW YORK, Feb 20 (Reuters) - The dollar gained against the euro for a second straight day on Thursday after euro zone business surveys pointed to a sluggish recovery and a fragile outlook for the region, while the greenback also drew support from strong U.S. economic data.
Markit's Composite Purchasing Managers' Index for the euro zone, which is based on surveys of thousands of companies, dipped to 52.7, just below January's 31-month high of 52.9. The reading missed forecasts for a rise to 53.1.
The euro fell as low as $1.3685, pulling away further from a seven-week high of $1.37735 struck on Wednesday, and down 0.11 percent on the day.
The euro was also down against the Japanese yen, falling about 0.1 percent to 140.40 yen, and was down slightly against the Swiss franc. Europe's common currency was flat against the British pound.
Adding to the euro's problems was a much softer-than-expected reading of French inflation, which kept alive risks of deflation in the euro zone.
The French PMI data came in well below forecasts while German figures that did little to counter worries that the euro zone economy will need more stimulus from the European Central Bank.
"The recovery is far from certain in Europe," said Clem Miller, investment strategist at Wilmington Trust Investment Advisors in Baltimore.
Highlighting some of the choppiness that the euro could face in the near term, one-month euro/dollar implied volatility - a gauge of how sharp swings will be - edged up to 6.4 percent, climbing from a six-year low struck earlier this week.
Strong U.S. economic data released Thursday supported the dollar's gains versus the euro.
The Labor Department reported that initial claims for unemployment benefits declined by 3,000 last week to a seasonally adjusted 336,000. The decline pointed to steadily improving labor market conditions despite two straight months of weak hiring.
In a separate report, the Labor Department said strong gains in the price of household energy had accounted for most of a 0.1 percent rise in the Consumer Price Index in January.
U.S. manufacturing activity, meanwhile, accelerated in February at its fastest pace in nearly four years due in part to growth in new orders, financial data firm Markit said.
"The U.S. economic data this morning definitely benefited the dollar across the board," said Blake Jespersen, managing director of foreign exchange at BMO Capital Markets in Toronto.
The dollar took in stride data on Thursday from the Philadelphia Federal Reserve Bank showing factory activity in the U.S. mid-Atlantic region unexpectedly contracted in February.
DOLLAR GAINS AGAINST YEN, FRANC
The euro's drop helped the dollar recover against a basket of currencies. The dollar index was trading 0.17 percent higher on the day at 80.277.
The dollar was also slightly higher against the yen at 102.340 and on pace to post its best weekly performance since late December.
"There's an increasing realization that the Japanese economy is weaker than everyone expected," said Miller of Wilmington Trust.
Japan suffered a record trade deficit in January as growth in exports spurred by a weak yen was outstripped by a surge in import costs, recent data showed.
The dollar was also up 0.1 percent on the day against the Swiss franc to trade at 0.8894.
- USA News