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Dollar hits 4-month high after better-than-expected U.S. housing starts

John Phillips | Digital Editor | CNBC

The dollar rose to a four-month high against a basket of major currencies on Tuesday after the release of data showing U.S. housing starts rose more than expected in June, underpinning a theme of strength in the U.S. economy.

Groundbreaking on U.S. homes surged 4.8 percent to a seasonally adjusted annual pace of 1.19 million units, the Commerce Department said.

After June's jobs report showed U.S. employers added 287,000 jobs, beating expectations by more than 100,000, continued positive data has some investors pricing back in the chances the Federal Reserve will raise U.S. overnight interest rates, analysts said.

Higher interest rates increase a currency's return, making it more attractive to investors.

Where is the Japanese yen heading?

The dollar index, which tracks the greenback against six major currencies, rose to 97.126, its highest level since mid-March. The dollar index was last up 0.56 percent at 97.10.

The rise in the dollar index was backed by a sizeable fall in the euro, which dipped to an 11-day low against the dollar of $1.1011. The euro was last down 0.53 percent at $1.1011.

The dollar also gained ground against the , touching its highest level against the Japanese currency since June 24, the day after Britain's surprise vote to leave the European Union. The dollar last remained flat at 106.12 yen.

"There's more enthusiasm about the U.S. economy," said Vassili Serebriakov, FX strategist at Credit Agricole in New York. "It hasn't really translated into a big increase in Fed tightening expectations but I think markets are starting to think the Fed could be back in the picture before the end of the year."

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Fed funds futures rates show investors see almost a 50/50 chance that the U.S. central bank raises rates by its December meeting, according to CME Group's FedWatch tool. Chances of a rate hike were below 20 percent less than a month ago.

The dollar also was boosted by expectations of upcoming central bank easing from the Reserve Bank of Australia and Reserve Bank of New Zealand.

The fell 1.5 percent to an 11-day low of $0.7476, while the New Zealand dollar hit a three-week trough, falling 1.35 percent to 0.7018, as investors ramped up bets that both central banks could ease monetary policy as early as next month.

"There are a lot of individual stories," Serebriakov said. "It's been kind of a combination of idiosyncratic drivers for currencies as well as the broader dollar story."