FOREX-Dollar hovers near 3-year high, sterling slides on dismal UK data
* Dollar set for more gains on Fed outlook, economy
* Sterling hits four-month low vs dollar after weak UK data
* CFTC data suggest more dollar upside
* Euro flat; any bounce seen likely to fizzle out
NEW YORK, July 9 (Reuters) - The dollar rose on Monday, hovering near a three-year high against a basket of currencies, as investors remain convinced the Federal Reserve is leaning toward reducing economic stimulus, at a time when central banks around the world could further ease monetary policy. The dollar's largest gain was versus the British pound, after weaker-than-expected United Kingdom data drove sterling close to a three-year low, highlighting how the U.K.'s economy is lagging the strength seen in the United States. Last week's U.S. employment report fueled expectations that the Federal Reserve could soon scale back its stimulus. In contrast, the European Central Bank and the Bank of England are widely seen as more likely to ease monetary policy. The Bank of Japan, meanwhile, is expected to continue with aggressive stimulus. Expectations the Fed, which releases minutes from its June monetary policy meeting on Wednesday, will scale back its $85 billion-a-month in asset purchases as early as September are encouraging investors to buy dollars. "This is momentum-driven trade and we are looking for more dollar strength," said Mankash Jain, head of FX and Investment Management at Solo Capital. "Any bounce in the euro towards $1.2950 is a time to initiate fresh short positions." Likewise, any modest decline in the dollar in coming days "will provide a renewed buying opportunity as the overall picture is positive for the dollar," said Ian Stannard, head of European FX strategy at Morgan Stanley. He said Wednesday's FOMC minutes would be scrutinized for any hints to when monetary stimulus could be reduced. The most recent Commodity Futures Trading Commission data showed dollar long positioning building into the end of the second quarter but still below the peak seen in May, suggesting further upside for the dollar. The value of the dollar's net long position rose to $22.37 billion in the week ended July 2, from $13.28 billion the previous week. In early morning New York trade, the dollar index, which measures the greenback against a basket of six currencies, was up 0.1 percent at 84.312, not far from a three-year peak of 84.588 hit Monday. The euro was down 0.1 percent at $1.2852, holding above Friday's seven-week trough of $1.2806. The single currency, which began July above $1.30, found some support after Greece secured aid that will prevent it from defaulting in August. But with the European Central Bank set to keep rates at record lows, the euro is likely to remain under pressure. "Central banks in Europe are walking on eggshells given the tricky challenges of deleveraging and the contagion from Fed policy in an environment where economic news has been rather positive," Barclays Capital said in a research note. "We think that monetary policy is likely to remain accommodative for a long time, and that central banks will have to combat the risk of an increase in market interest rates, possibly with non-conventional measures and/or more precise forward guidance."
STERLING DROPS Sterling hit four-month lows against the dollar and the euro after weak factory output and trade data was seen as raising the risk of the Bank of England easing monetary policy in coming months. Sterling fell 0.8 percent to $1.4832, its lowest since mid-March. A drop below $1.4832 would take it to a three-year low. It last traded down 0.6 percent at $1.4864. "Short sterling/dollar remains a favored trade and our view has long been that US-UK growth differentials are a convincing rationale for further downside," Commerzbank said in a note. The dollar gained against the yen as the Bank of Japan is expected to maintain aggressive monetary stimulus when it meets to decide on policy later this week. The dollar rose 0.2 percent to 101.18 yen, off a near six-week high of 101.53 yen hit on Reuters trading platform on Monday.