Arrangement of various world currencies including Chinese Yuan, Japanese Yen, US Dollar, Euro, British Pound, Swiss Franc pictured in Warsaw

Arrangement of various world currencies including Chinese Yuan, Japanese Yen, US Dollar, Euro, British Pound, Swiss Franc pictured in Warsaw (Kacper Pempel Reuters, / September 18, 2014)


NEW YORK (Reuters) - The dollar climbed to a four-year high against a basket of currencies and hit a two-year high against the euro on Tuesday after euro zone inflation fell in September, putting the greenback on track for its biggest quarterly gain in six years.

The Norwegian crown was another big mover, up 0.9 percent to a three-week high of 8.114 crowns per euro after its central bank unveiled plans to buy 250 million crowns per day in October.

"U.S. data have been very supportive of the dollar against other major currencies," said Sireen Harajli, currency strategist at Mizuho Corporate Bank in New York.

The dollar index , which measures it against a basket of six major currencies, has gained 7.7 percent over the last three months, the biggest quarterly gain since 2008 and a record-setting 11 straight weeks of gains. It was last up 0.4 percent at 85.91.

The United States will likely expand faster than Japan and the euro zone in the foreseeable future, which will cause the Federal Reserve to raise interest rates ahead of its Japanese and European counterparts, analysts said.

Data showed euro zone inflation slowed to 0.3 percent year-over-year rise in September from 0.4 percent the previous month, pushing the 18-nation block closer to deflation which the European Central Bank seeks to avert.

The anticipated policy divergence between the ECB and the Fed has helped grow the spread between the two-year U.S. Treasury yield and its German counterpart to 65 basis points, close to the widest in seven years and bolstering the appeal of the dollar.

Earlier, the euro sank below $1.26 for the first time since September 2012, hitting a low of $1.25710 on the EBS trading platform. It was last down 0.4 percent at $1.2629.

The euro was on track to fall 7.8 percent against the dollar in the third quarter, its biggest quarterly loss since the second quarter of 2010.

The dollar inched up to another six-year high against the yen of 109.86 yen , and was last trading up 0.17 percent on the day at 109.695 yen.

Some analysts had cautioned that the dollar's three-month-long rally was at risk of running out of steam, particularly against the yen.

"It seemed overstretched at the moment," Harajli said.

The greenback was on pace to rise 8.3 percent versus the yen in the quarter, the biggest quarterly gain in six quarters.

Tuesday's mildly disappointing U.S. data on housing, consumer confidence and Midwest business activity pushed the dollar off its earlier highs.

"We do think the trend is still favorable for the greenback. The United States still looks better than most of the world," said Gary Thayer, chief macro strategist at Wells Fargo Advisors in St. Louis, Missouri.

Among other currencies, the New Zealand dollar edged up 0.4 percent at $0.7797 after hitting its lowest in nearly 14 months following data that showed that country's central bank weakened the kiwi in August. For the quarter, it has fallen 11 percent, one of the weakest developed currencies in the third quarter.

The Hong Kong dollar steadied after falling on Monday against the dollar on worries about how aggressively Beijing might deal with pro-democracy protesters there.


(Additional reporting by Jemima Kelly and Patrick Graham in London, Lisa Twaronite in Tokyo and Ian Chua in Sydney; Editing by Mark Trevelyan, David Gregorio and Tom Brown)