Dollar rises for 3rd day on upbeat U.S. data, higher risk appetite

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NEW YORK/LONDON (Aug 27): The dollar advanced for a third consecutive session on Thursday, bolstered by data showing a much stronger U.S. economy than had been thought and by gains in global equities, which benefited from improving risk sentiment.

U.S. data showing falling jobless claims and a faster growth rate than had initially been estimated in the world's largest economy underpinned the dollar.

The reports, however, did little to change the view that the Federal Reserve would delay raising interest rates given recent market turmoil and a slowdown in China's economy.

"If we take China, and global equities falling, out of the equation, what the data does is solidify the view that the U.S. economy is and has been improving," said John Doyle, director of markets at Tempus Consulting in Washington.

"Even if we don't raise rates in September and it gets kicked out to December or even early next year, raising rates is still the conversation that we're having. We are still moving toward a normalization of U.S. policy."

Data showed that U.S. gross domestic product expanded at a 3.7% annual pace in the second quarter instead of the 2.3% rate reported last month. Further brightening the U.S. picture was a fall in U.S. jobless claims to 271,000 last week, the 25th straight week below 300,000.

Meanwhile, comments on Wednesday from New York Fed President William Dudley, a voting member of the rate-setting Federal Open Market Committee, downplaying prospects of a September rate hike helped improve sentiment. Investors unwound recent moves that had lifted both the yen and the euro.

On Thursday, Kansas City Fed President Esther George, who had argued for a near-term rate increase, echoed Dudley's sentiment. She told Fox Business News central bankers should take a "wait-and-see" approach to tightening policy due to a financial market sell-off and China's slowdown.

In mid-morning trading, the dollar was up 0.6% against a currency basket at 95.663. The index has risen roughly 2.5% the last three days.

The dollar was up 0.4% at 120.36 yen, well above a seven-month low of 116.15 yen struck this week. The euro was 0.5% lower against the dollar at $1.1259, well below this week's seven-month high of $1.1715.

A recent spike in risk aversion had triggered short-covering in the yen and the euro, which are popular funding currencies for carry trades. Such trades involve selling low-yielding currencies to buy higher-yielding currencies and assets.