Dollar drifts up as Greek worries ease in Europe

LONDON (Reuters) - Reports that Greece will get six months of temporary aid from the euro zone helped European markets recover on Tuesday, as the likelihood of a U.S. rate increase this year pushed up the dollar and Treasury yields.

European shares <.FTEU3> rose along with the euro after several media reports of a possible debt agreement between Greece and its international creditors before a meeting between the bloc's finance ministers Wednesday.

U.S. markets also benefited, with the S&P 500 <.SPX> , Dow Jones <.DJI> and the Nasdaq <.NDX> all opening up 0.5 percent to shake off two days of back-to-back falls.

Jobs and retail sales data were also due, but market sentiment was still focused on last week's employment report, which heightened expectations the U.S. would raise rates this year.

The dollar <.DXY> reached a one-month high of 119.36 yen and Treasury yields rose again after jumping on Friday. The euro earlier fell as low as $1.1275 before hopes of Greek debt deal lifted it above $1.13.

"You're just seeing a bit of dollar strength across the board," said Peter Kinsella, a strategist with Commerzbank in London. "There?s no immediate catalyst for further dollar strength at the moment, although I?m sure we?ll see it, and you?ve got everybody waiting for Greece as of tomorrow with the Eurogroup meeting."

Concern about disinflation and deflation resumed after China reported inflation fell below 1 percent, a five-year low, leading to talk of further easing by China's central bank.

"We will make appropriate and timely adjustments ... to prevent the economy from sliding, but (we will) also pay attention to avoid 'pumping out' too much money," China's central bank said after the inflation data.

Shares in Shanghai rose more than 1 percent, but the rest of Asia declined overnight.

Commodity price-dependent currencies such as the Australian dollar and Norwegian crown < EURNOK=> got a lift, though the main focus remained the rise of the dollar <.DXY> and the euro's moves.

CURRENCY DISCOMFORT

The Group of 20 countries will pledge to act on monetary and fiscal policy if necessary to combat persistent stagnation, according a draft communique from G20 finance ministers and central bankers meeting in Istanbul. However, the United States had emphasized countries should not to devalue their currencies to boost exports.

On the strains on the euro, Saxo bank's head of FX strategy, John Hardy, pointed out that markets appear relatively relaxed about a potential exit of Greece from the 19-member currency bloc.

Although Greek markets have been hit hard -- benchmark Greek bond yields remain above 10 percent -- the euro has performed well against currencies other than the dollar. There has been limited impact on Spanish and Italian bond markets.

Among commodities, safe-haven gold dipped and crude oil snapped three days of gains after a survey showed that U.S. commercial crude stockpiles rose to a record high last week.

Crude jumped on Monday as OPEC forecast greater demand this year than previously thought and projected less supply from countries outside the producer group.

U.S. crude was last down 1.2 percent at $52.24 a barrel after gaining 2.3 percent overnight. Brent was 0.2 percent lower at 58.24 percent.

(Additional reporting by Patrick Graham in London; Editing by Larry King)