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Dollar slips as upbeat euro zone business activity data lifts euro

FILE PHOTO: Illustration shows U.S. Dollar and Euro banknotes

By Saqib Iqbal Ahmed

NEW YORK (Reuters) -The dollar edged lower against the euro on Tuesday after data showed euro zone business activity made a surprise return to modest growth in January, while U.S. business activity shrank for a seventh straight month.

While U.S. business activity shrank in January, the downturn moderated across both the manufacturing and services sectors for the first time since September and business confidence strengthened as the new year began.

"It just looks like another piece of data showing what the Fed has been preaching: the economy is resilient enough to take on more hikes," said Juan Perez, director of trading at Monex USA in Washington.

Fed fund futures see only two more quarter-point rate hikes by the Fed to a peak of around 5% by June, before it starts cutting rates later in the year. The Federal Reserve itself has insisted it still has 75 bps of increases in the pipeline.

"It is clear looking at PMIs that the Fed has prevented expansion, but the economy has not taken a hit like many thought," Perez said.

Still, the dollar, which briefly gained on the euro after the U.S. data, slipped to trade lower on the day, not far from the 9-month lows hit in the previous session.

The euro was 0.09% higher at $1.0881, just shy of the 9-month high of $1.0927 touched on Monday.

The common currency was backed by survey data supporting the view that the euro zone economy was weathering a winter of intense price pressures reasonably well, analysts said.

Surveys showed euro zone business activity made a surprise return to modest growth in January, and service-sector activity in Germany expanded for the first time since June, although price pressures remained sticky.

A stronger economy could potentially allow the European Central Bank to raise interest rates more aggressively as it tackles inflation.

"But if earnings and other items put a negative light on the globe, the euro is more quickly to suffer the consequences than the buck," Monex USA's Perez said.

The dollar rose to a near 1-week high against the yen, before giving up those gains to trade down 0.44% to 130.095 yen.

Last week, the dollar fell to as low as 127.215 yen, its weakest since May, ahead of a Bank of Japan policy review at which investors bet the central bank might signal the end of its stimulus program. The BOJ, however, left policy unchanged, giving the dollar some respite.

Sterling was one of the worst-performing major currencies against the dollar, falling 0.34% on the day to $1.2334, after a survey showed British private-sector economic activity fell at its fastest rate in two years in January.

"Looking forward, we expect sterling to start underperforming neighboring European currencies as economic data highlights widening growth differentials," said Simon Harvey, head of FX Analysis at Monex Europe.

Meanwhile, bitcoin was little changed on the day at $22,973, steadying after having jumped by about a third in value since early January, as investors shook off pessimism after the high-profile collapse of crypto exchange FTX.

(Additional reporting by Amanda Cooper in London; editing by Jacqueline Wong, Simon Cameron-Moore, Christina Fincher, Andrea Ricci and Mark Heinrich)