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FOREX-Dollar up after data signals brighter outlook for U.S. business activity

(Updates prices, market activity, comments to U.S. market open; previous LONDON)

By Saqib Iqbal Ahmed

NEW YORK, Jan 24 (Reuters) - The dollar rose against the euro on Tuesday after data showed U.S. business activity contracting for the seventh straight month in January but with signs the downturn was moderating.

While U.S. business activity shrank in January, the downturn moderated across both the manufacturing and services sectors for the first time since September and business confidence strengthened as the new year began.

"It just looks like another piece of data showing what the Fed has been preaching: the economy is resilient enough to take on more hikes," said Juan Perez, director of trading at Monex USA in Washington.

Fed fund futures see only two more quarter-point rate hikes by the Fed to a peak of around 5% by June, before it starts cutting rates later in the year. The Federal Reserve itself has insisted it still has 75 bps of increases in the pipeline.

"It is clear looking at PMIs that the Fed has prevented expansion, but the economy has not taken a hit like many thought," Perez said.

The dollar extended its gains against the euro but remained near 9-month lows hit in the previous session. The euro was 0.17% lower at $1.0852, just shy of the 9-month high of $1.0927 touched on Monday.

The euro itself was supported through the day after euro area data on Tuesday reinforced the view that the economy was weathering a winter of intense price pressures reasonably well, analysts said.

Surveys showed euro zone business activity made a surprise return to modest growth in January, and service-sector activity in Germany expanded for the first time since June, although price pressures remained sticky.

A stronger economy could potentially allow the ECB to raise interest rates more aggressively as it tackles inflation.

"There is probably enough in there to cement another 50 basis points in increases from the ECB," TraderX market strategist Michael Brown said.

The U.S. business activity data helped lift the dollar to a near 1-week high against the yen. The U.S. currency was last up 0.03% to 130.7 yen.

Last week, the dollar fell to as low as 127.215 yen, its weakest since May, ahead of a Bank of Japan policy review at which investors bet the central bank might signal the end of its stimulus program. The BOJ, however, left policy unchanged, giving the dollar some respite.

Sterling was one of the worst-performing major currencies against the dollar, falling 0.71% on the day to $1.2288, after a survey showed British private-sector economic activity fell at its fastest rate in two years in January.

"Looking forward, we expect sterling to start underperforming neighboring European currencies as economic data highlights widening growth differentials," Simon Harvey, who is head of FX Analysis at Monex Europe, said.

Meanwhile, bitcoin was little changed on the day at $22,878, steadying after having jumped by about a third in value since early January, as investors shook off pessimism following the high-profile collapse of the FTX crypto exchange FTX.

(Additional reporting by Anada Cooper in London; Editing by Jacqueline Wong, Simon Cameron-Moore, Christina Fincher and Andrea Ricci)