Dollar buoyed by housing data; sterling shines on rate optimism

By Michael Connor

NEW YORK (Reuters) - The dollar rose against the euro on Tuesday, getting a lift from data showing U.S. housing starts close to an eight-year peak, which bolstered expectations the Federal Reserve will raise interest rates as soon as next month.

A 6-percent drop in Chinese stocks drove many investors into safe-haven currencies such as the yen and the Swiss franc, which were up against the dollar. The British pound shot to a seven-week high of $1.5717 against the dollar.

U.S. housing starts rose last month as builders accelerated construction of single-family homes, the Commerce Department said. Groundbreakings, at a seasonally-adjusted annual pace of 1.21 million units, were the strongest since October 2007..

The starts report beat forecasts and added to solid payrolls, retail sales and industrial output data, which suggest the economy got off to a robust start in the third quarter and can handle Fed tightening moves.

The dollar index <.DXY>, which had been down on the day, pivoted to a gain after the housing starts report and was last up 0.20 percent in early New York trading.

The euro was last off 0.50 percent at $1.1025 against the dollar, which was up 0.02 percent against the yen at 124.40 yen after earlier hitting a session high of 124.51 yen.

The British pound was boosted by stronger-than-expected inflation data for July, including an uptick in core inflation, which hit a five-month high.

Sterling rose to a seven-week high of $1.5717 after the data and was last at $1.5658, or a 0.5 percent gain for the day.

The inflation numbers bolstered expectations that the Bank of England will raise interest rates in coming months and helped sterling gain more than 1 percent against the euro.

Earlier, China's main Shanghai Composite and Shenzhen 300 indices each lost more than 6 percent <.SSEC> <.CSI300> as investors bet that demand in China will cool, drag on the trade-reliant economy, and create more doubts about a global recovery.

"There is a risk-off environment, given the drop in the Chinese stock markets. Investors are cautious about whether the Fed will raise rates, given a slowdown in China and global deflationary conditions," said Petr Krpata, FX strategist at ING.

Treasury investors were looking to Wednesday, when U.S. inflation data will be published, as well as minutes from the Fed's most recent policy meeting. Both releases will be scoured for clues on when the Fed will end near-zero interest rates and raise some short-term rates for the first time in nearly a decade.

(Editing by Peter Galloway)

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