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FOREX-Dollar gains against euro after weak euro zone data

* Euro zone PMI data comes in below forecasts

* Strong U.S. economic data supports dollar

* Dollar turns positive against yen

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 0.24 percent on the day.

The euro was also down against the Japanese yen, falling 0.2 percent at 140.25 yen, and was flat against the British pound and the Swiss franc.

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 euro weakness appears to be due to a combination of both French inflation and euro area PMI coming in a bit softer," said Matthew Derr, currency strategist at Credit Suisse in New York.

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 euro's drop helped the dollar recover against a basket of currencies. The dollar index was trading 0.3 percent higher on the day at 80.368.

The dollar also turned positive against the Japanese yen and was last trading up 0.06 percent at 102.370.

The other big loser was the Australian dollar, hurt by an HSBC survey that showed activity in China's factories shrank again in February as employment fell at the fastest pace in five years.

The Aussie, which closely tracks the economic fortunes of China, Australia's biggest trading partner, it shed 0.3 percent to US$0.8980.