* Dollar firms versus basket of currencies
* Yen gains against most majors
* Major U.S. stock indexes fall sharply
* U.S. manufacturing expanded in August
(Recasts, updates prices, adds details, comments, changes
byline)
By Nick Olivari
NEW YORK, Sept 1 (Reuters) - The yen and dollar rose on
Tuesday as fears of further U.S. bank failures overshadowed
unexpectedly strong U.S. manufacturing data, boosting the two
currencies' safe-haven appeal.
Major U.S. stock indexes <> <.SPX> <> were down
nearly 2 percent in afternoon U.S. trading as investors fretted
that chatter from hedge funds on a bank failure could prove
accurate.
The decline came despite upbeat economic news from the
United States and euro zone as well as a stabilization in
Chinese shares after a rout on Monday.
The hedge fund talk "is a huge driver" of currency markets,
said Dan Cook, senior market analyst at IG Markets Inc in
Chicago. "When you have data like we had but the Dow drops,
people are running for that safe haven."
In midafternoon trading in New York the dollar index
<.DXY>, which tracks a basket of six major currencies, was up
0.8 percent at 78.786, rebounding from a session low of 77.944,
according to Reuters data.
The dollar was little changed against the yen <JPY=> at
93.01 yen, slightly above Monday's seven-week low of 92.53,
according to Reuters data.
But the yen was up 0.9 percent against the Canadian dollar
<JPYCAD=R>, 0.7 percent against the Swiss franc <JPYCHF=R>, 0.8
percent against the euro <JPYEUR=R> and 0.8 percent against the
pound <JPYGBP=R>.
The euro was down 0.9 percent against the dollar at $1.4205
<EUR=>, well below a session high of $1.4377 <EUR=>.
WHAT RECESSION?
The U.S. manufacturing sector expanded in August for the
first time in more than a year and a half. The Institute for
Supply Management's index of national factory activity rose to
52.9 from 48.9 in July. For more see [].
Separate data showed pending sales of previously owned U.S.
homes raced to a two-year high in July, further evidence the
housing market was on a steady recovery path. []
"Clearly, the U.S. data is surprising to the upside," said
Jack Iles, senior portfolio manager who helps manage $2.5
billion assets at MFC Global Investment Management in Boston.
But despite a batch of upbeat U.S. economic numbers, major
currencies remained in ranges as investors continued to debate
about the outlook for the global economy, analysts said.
"At the end of the day, the market is still in wait-and-see
mode," said Firas Askari, head of currency trading at BMO
Capital Markets in Toronto. "We're getting jostled around by
every piece of data that comes out and I don't think there's a
consensus that this economy has legs."
Data released earlier also showed euro zone purchasing
managers' index (PMI) rose to 48.2 in August against forecasts
for a 47.9 reading while German unemployment unexpectedly fell
in August. [] []
The data comes before a European Central Bank policy
meeting on Thursday widely expected to keep benchmark rates
steady at a historic low of 1 percent, with the focus on
policymakers' outlook on the economy.
Sterling erased early gains against the dollar and the euro
after an unexpected dip in UK manufacturing in August, stoking
concerns about the pace of recovery in the British economy.
[]
Sterling was down 0.9 percent at $1.6135 <GBP=>, after
touching a six-week low, and was little changed against the
euro at 88.02 pence <EURGBP=>.
In other trading, the Australian dollar <AUD=> fell 2.1
percent to US$0.8265. The Reserve Bank of Australia, holding
its cash rate at 3.0 percent as expected, said the current low
level of rates was appropriate, countering speculation it would
adopt an explicit tightening bias. []
(Additional reporting by Steven C. Johnson and Wanfeng Zhou;
Editing by James Dalgleish)
