U.S. rate hike prospects lift dollar, Treasury yields

NEW YORK (Reuters) - The dollar traded at one-week highs and shorter-term U.S. Treasury yields rose on Thursday as accelerating U.S. gross domestic product data encouraged bets that policymakers will start hiking U.S. interest rates as soon as September.

Wall Street was mostly lower in part due to soft corporate earnings reports, while oil prices shrugged off earlier drag from the dollar's gains and edged higher on an unexpectedly big drop in U.S. oil inventories.

The euro fell 0.70 percent against the dollar to $1.0909, which helped the dollar index <.DXY> rise 0.70 percent at 97.641 after touching 97.773, its highest since July 22.

"The latest GDP report confirms the Fed's narrative that the first-quarter weakness was transitory. The bar for them to hiking rates is not very high," said Ian Gordon, G10 currency strategist at Bank of America Merrill Lynch in New York

Data showed economic growth in the United States accelerated in the second quarter, backed by solid consumer demand, to a 2.3 percent annual rate. While slightly below economists' expectations for 2.6 percent growth, the data still pointed to firming domestic fundamentals.

The U.S. Federal Reserve on Wednesday described the economy as expanding "moderately," with improvements in housing and the labor market. That left the door open for a possible hike in interest rates in September, which would be the first rise since 2006.

Treasury prices, which move in the opposite direction of yields, were mostly off. Price declines were largest in 3-year and 5-year maturities, while benchmark 10-year Treasuries were last up 2/32 of a point in price, pushing the yield to 2.2697 percent.

Wall Street's Dow Jones industrial average <.DJI> was last off 1.96 points, or 0.01 percent, to 17,749.43, the S&P 500 <.SPX> was down 0.54 points, or 0.03 percent, to 2,108.03 and the Nasdaq Composite <.IXIC> rose 17.30 points, or 0.34 percent, to 5,129.04.

Procter & Gamble's 3.7 percent fall dragged down the Dow, after the company reported a sixth straight quarter of lower sales. Facebook shares fell 3.9 percent after the social media company's profit fell.

Europe's main stock markets <0#.INDEXE> held on to a third day of gains as results from Siemens , Nokia and Deutsche Bank and a rise in euro zone-wide sentiment boosted the mood. [.EU]

The pan-European FTSEurofirst 300 <.FTEU3> closed up 0.6 percent.

With the dollar flexing its muscles again, commodity markets were back under pressure, with copper , considered a bellwether for global economic activity, trading near a six-year low at $5,259 a tonne.

The broad Thomson Reuters CRB commodities index <.TRJCRB> hit a fresh six-year low before recovering some ground. Gold flirted with a 5-1/2-year low at $1,089 an ounce as its appeal ahead of potentially higher global interest rates remained in question.

Oil prices, smarting from rising U.S. shale oil output and an easing of sanctions on Iran, fared slightly better, having bounced on Wednesday following an unexpectedly large weekly drawdown in U.S. crude inventories.

Front-month Brent crude futures were up 0.20 percent at $53.47 a barrel, and U.S. crude was near flat at $48.80 having pulled away from Tuesday's 4-1/2-month low. They have both lost more than 15 percent in July.

(Reporting by Michael Connor in New York; Editing by Bernadette Baum and Meredith Mazzilli)

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