US dollar flat to modestly higher as upbeat data backs May rate hike

SINGAPORE, April 21 (Reuters) - The U.S. dollar was little changed to slightly higher against major currencies on Friday, as business activity data suggested that the world's largest economy remained resilient, supporting expectations of another 25-basis-point interest rate increase by the Federal Reserve at next month's policy meeting.

Against commodity currencies, the greenback gained as well. Overall, the dollar index was on track for its first weekly gain in nearly two months on rate increase expectations for May.

Data showed on Friday that S&P Global's flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, increased to 53.5 this month, the highest since May last year and followed a final reading of 52.3 in March. It was the third straight month that the PMI remained above 50, indicating growth in the private sector.

"Although economic activity is cooling, rate differentials are still dollar-supportive, and the U.S. remains the cleanest dirty shirt on the global economic landscape," said Karl Schamotta, chief market strategist, at Corpay in Toronto.

In the case of the euro, a surprising recovery in the euro zone economy in April underpinned the currency.

The dollar index, which measures the performance of the U.S. currency against six others, was flat at 101.76 and headed for a weekly gain of about 0.2%, its first since late February.

The greenback's outlook, however, remained tilted to the downside as investors braced for the end of the Fed's tightening cycle. Fed officials though have been at pains to point out that inflation remains uncomfortably high and rates must keep rising.

Money markets on Friday continued to show expectations of a quarter-point U.S. rate hike next month, which is dollar-positive, followed by a pause in June. The rate futures market has also priced in rate cuts this year as the economy slows.

"The buck is no longer strongly supported by the Fed's message on interest rate hikes and other currencies are flowing as a result of growing optimism globally about a second half of the year that will see not only lower inflation, but avoid too strong of a recessionary pressure," said Juan Perez, director of trading at Monex USA in Washington.

Elsewhere, the recovery in the euro zone unexpectedly gathered pace this month, thanks to a boom in services sector demand compensating for a deepening decline in manufacturing.

HCOB's flash Composite Purchasing Managers' Index (PMI), compiled by S&P Global as well and seen as a good gauge of overall economic health in the euro zone, jumped to an 11-month peak of 54.4 in April from March's 53.7.

The euro was last up 0.1% against the dollar at $1.0982 , recovering from a session low of $1.0938.

In other currencies, sterling dipped 0.1% to $1.2431, having dropped by as much as 0.54% earlier on.

The yen was one of the stronger performers earlier in the session, rising to a one-week high against the dollar, amid data showing Japanese consumer inflation held steady above the central bank's target in March. That has put pressure on the Bank of Japan (BOJ) to ditch its ultra-loose monetary policy stance.

Incoming Governor Kazuo Ueda chairs his first BOJ policy meeting next week.

The dollar was last slightly lower against the Japanese unit at 134.17 yen.

Currency bid prices at 3:26PM (1926 GMT)