Upbeat U.S. data lift dollar index to two-month high

October 5, 2016 8:38 PM EDT

Light is cast on a U.S. one-hundred dollar bill next to a Japanese 10,000 yen note in this picture illustration shot February 28, 2013. REUTERS/Shohei Miyano/Illustration/File Photo

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By Richard Leong

NEW YORK (Reuters) - The dollar rose against a basket of currencies on Thursday to its strongest level in two months as encouraging data on U.S. jobs reinforced the view the Federal Reserve would raise interest rates at the end of the year.

Sterling on the other hand fell to a 31-year low versus the greenback on renewed anxiety about the repercussion from Britain's "hard" exit from the European Union.

First-time filings for U.S. jobless benefits unexpectedly fell to a near 43-year low, the U.S. Labor Department said.

On Friday, the government's payrolls report is due at 8:30 a.m. (1230 GMT) in which analysts polled by Reuters forecast a hiring of 175,000 workers in September.

On Wednesday, the Institute for Supply for Management's U.S. services activity index posted a record monthly rise in September to its highest level in 11 months.

"It looks like the U.S. economy is righting itself at the end of the third quarter," said Christopher Vecchio, currency analyst at DailyFX in New York.

The growing spread between U.S. and German bond yields has also bolstered the greenback. The difference between two-year U.S. and German government debt was 1.52 percentage points on Thursday, its widest in a decade.

The dollar index was last up 0.55 percent at 96.658 after touching its highest level since late July. <.DXY>

The greenback reached a one-month peak versus the yen, last up 0.5 percent at 104.04 yen.

The euro slipped against the dollar after the European Central Bank released minutes on its Sept. 7-8 meeting where policymakers agreed on ongoing monetary stimulus to support the euro zone economy.

The minutes undermined speculation the ECB would consider tapering its monthly bond purchases as it may conclude its quantitative easing program, perhaps as early as March 2017.

The single currency was down 0.4 percent at $1.1153.

The euro touched a near five-week high versus the yen at 116.28 yen before retreating to 116.03 yen, up 0.05 percent on the day.

Sterling slipped against the dollar as investors fretted that the British government's perceived tough stance to leave the EU would harm its economy.

"My base case is that it is going to be extremely hard for the UK to escape recession. The first two quarters of next year are going to be extremely negative," said Davis Hall, Head of FX and Precious Metals at Indosuez Wealth Management in Geneva.

The pound was 1 percent lower at $1.2626 after touching a fresh three-decade low of $1.2622 .

It fell to a five-year low against euro at 88.51 pence earlier Thursday. It was last down 0.5 percent at 88.32 pence per euro.

(Additional reporting by Patrick Graham in London; Editing by Mark Trevelyan and Meredith Mazzilli, Grant McCool)

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