Dollar resumes rally amid US markets reopen

The dollar extended gains in late European trade on Tuesday, with the U.S. markets returning from the Labor Day Holiday. The euro and the Japanese yen dropped amid speculation that slower growth will prompt policymakers to push on stimulus.

The risk sentiment was subdued in the currencies markets after data yesterday showed that factory output in China, the U.K and the euro area slowed in August, fueling speculation that world central banks will accelerate stimulus measures. Policymakers at the European Central bank and Bank of England will meet later this week to announce the next policy direction, so investors are becoming more cautious ahead of the two meetings.

On the economic front, the market consensus will be watching manufacturing data from the world`s largest economy. A greater acceleration in August, on top of a very solid July, would further lift the manufacturing outlook, but the consensus forecast is expecting a soft deceleration.

The U.S. Institute for Supply Management`s factory index for August will be out at 10:00 am ET, probably slipping to 57.0 compared with July`s reading of 57.1.

The dollar hit a 14-month high against a six-currency basket this morning, with the USDIX firming around 82.96 as of 13:13 GMT compared with the day`s open at 81.45.

Meanwhile, investors are still weighing some rumors about the ECB`s next policy measures. Mario Draghi, the ECB President, called last week for greater emphasis on fiscal stimulus over austerity.

Draghi comments were welcomed in France as President Francios Hollande also hinted yesterday that deflation and weak growth were threatening the European Union`s recovery.

The geopolitical tensions in Eastern Europe continue to weigh on the euro, while giving the dollar more to rally as markets still fears further sanctions against Russia by the West. In Ukraine, government accused Russia of "direct and undisguised aggression" that caused Kiev`s forces to suffer a further reverse in their war with pro-Moscow rebels.

As of 13:13 GMT, the EUR/USD moved lower around 1.3112 setting a session high at 1.3119 and low at 1.3110 compared with the day`s open at 1.3115.

The dollar marked further as the yen stood under pressure, slumping to its lowest level in five years against the greenback. The yen weakness was underpinned as markets await Prime Minister Shinzo Abe`s announcement of a new government on Wednesday.

During a meeting of the ruling Liberal Democratic Party on Tuesday, Abe announced that he would reshuffle his cabinet on September 3, for the first time since it was formed at the end of 2012, at a time when his country enters the second chapter of the economic recovery represented in the national security and local economies.

The USD/JPY traded higher around 104.95 hitting a session high at 104.96 and low at 104.29 compared with the day`s open at 104.35.