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Dollar hits 14-month high on new rate hike view

U.S. one-hundred dollar bills are seen in this photo illustration at a bank in Seoul August 2, 2013. REUTERS/Kim Hong-Ji

By Herbert Lash

NEW YORK (Reuters) - The U.S. dollar jumped to a 14-month high against the euro on Tuesday as investors bet the Federal Reserve would hike interest rates earlier than expected, a view that knocked down bond prices and helped weaken global equity markets.

The dollar consolidated broad gains from Monday after research from economists at the San Francisco Fed indicated investors may be underestimating when the U.S. central bank is likely to hike rates.

Benchmark U.S. Treasuries yields rose to their highest in over a month and European shares slipped for a third straight session as companies that trade dollar-denominated commodities such as oil took a hit.

The Fed research ramped up expectations that central bankers could signal an earlier-than-expected hike in rates at their policy-setting meeting next week on Sept. 16-17.

Recent data indicating a steadily strengthening U.S. economy also has bolstered the camp that believes rates may rise sooner than the mid-2015 consensus the market has expected.

"The Fed's projections for the path of interest rates are already more materially aggressive, more rapid hikes, than the market implies by its pricing," said Jake Lowery, fixed income portfolio manager at Voya Investment Management in Atlanta.

"The data over the last three months would at least give the Fed more confidence in that base case scenario," he said.

The euro fell to a 14-month low of $1.2860 in European trading before rebounding to trade 0.37 percent higher at $1.2944. The greenback rose to a six-year high of 106.47 yen and last traded at 106.19 yen, up 0.16 percent.

The benchmark 10-year U.S. Treasury note fell 8/32 in price to push its yield up to 2.4982. German bund futures (FGBLc1) fell 70 ticks to settle at 148.40

Stocks were mostly lower worldwide, with the exception of Canada, where the Toronto Stock Exchange's S&P/TSX composite index (.GSPTSE) closed 0.18 percent higher.

MSCI's all-country index fell 0.64 percent to 428.14, and the FTSEurofirst 300 index of European shares (.FTEU3) closed down 0.35 percent at 1,385.51.

On Wall Street, all 10 S&P 500 sectors ended lower. The Dow Jones industrial average (.DJI) closed down 97.55 points, or 0.57 percent, to 17,013.87. The S&P 500 (.SPX) shed 13.1 points, or 0.65 percent, to 1,988.44 and the Nasdaq Composite (.IXIC) lost 40.00 points, or 0.87 percent, to 4,552.29.

Gold prices fell below $1,250 an ounce as technical selling and speculation that the Fed and other central banks would raise rates earlier than expected sent prices to a three-month low.

U.S. COMEX gold futures (GCZ4) for December delivery settled down $5.80 an ounce at $1,248.50.

Brent crude oil prices fell to a 17-month low below $100 per barrel in volatile trade, down for a fourth day as ample supplies weighed. U.S. crude rose on the expectation of dwindling fuel stockpiles.

Brent (LCOc1) fell $1.04 to settle at $99.16 a barrel. U.S. crude (CLc1) rose 9 cents to settle at $92.75 a barrel.

(Reporting by Herbert Lash; Additional reporting by Marc Jones in London; Editing by Dan Grebler)