By Tommy Wilkes
LONDON (Reuters) - The dollar hit a new 2 1/2-month high on Tuesday, supported by worries about an escalation of the Sino-U.S. trade war and more signs the United States economy is outperforming rivals, while weak euro zone growth knocked the single currency lower.
Data showed that the euro zone grew less than expected in the third quarter and economic confidence continued to fall, sending the euro to a day's low.
The headwinds for the euro, which include a standoff between the European Union and Rome over Italy's rules-breaking budget, come just as demand for the dollar rebounds.
"Trade wars, a recovery on equity markets and poor data out of Europe and stronger data in the U.S." were supporting the dollar at the euro's expense, said Niels Christensen, chief analyst at Nordea.
"I don't think the euro will bounce back. There's no reason for the ECB (European Central Bank) to start sounding more hawkish unless inflation surprises," he said.
Investors bought into the dollar after Bloomberg reported that Washington was preparing to announce tariffs on all remaining Chinese imports by early December if talks between U.S. President Donald Trump and Chinese President Xi Jinping fail to ease the trade war.
YUAN AT DECADE LOW
With concerns about an escalating trade war and a Chinese economic slowdown mounting, the yuan hit a 22-month low in offshore markets
The yuan has been one of the biggest casualties as the dollar steamrolled higher in 2018.
The dollar, measured against a basket of its peers, rose 0.3 percent to 96.926 (DXY), its strongest since Aug. 15.
Friday's stronger-than-expected GDP numbers in the United States and a tentative recovery on Wall Street this week have again underlined that the U.S. economy is outperforming.
The euro dropped 0.2 percent to $1.1345 (EUR=), after reaching a 10-week low of $1.1336 on Friday. On Monday, the single currency fell on news German Chancellor Angela Merkel would not be seeking re-election as head of the Christian Democrats party.
"This [The euro's weakness] is due to Italian-budget-related political tension and fears over the future of the German political landscape, which threaten the single currency with further downside," said Ricardo Evangelista, senior analyst at online broker ActivTrades.
The Japanese yen extended its recent losses against the dollar, partly because Japanese investors have been net buyers of offshore equities this month.
The yen fell 0.4 percent to 112.845
In a sign that overall demand for risk was improving despite the trade war fears, the Australian dollar
The Aussie is often viewed as a barometer of broader risk sentiment, as well as a proxy for China-related risks since China is the largest buyer of Australia's key exports.