Array

NEW YORK, Mar 24 (Reuters) The dollar clung to modest gains on Friday but stumbled from session highs after a stronger-than-expected U.S. durable goods report for February showed weakness in a key component.

The dollar has been gaining all week, underpinned by a growing perception that the Federal Reserve will keep raising interest rates after an expected hike to 4.75 per cent next week.

Headline durable goods orders last month rose 2.6 per cent, above economists' forecast for a rise of 1.3 per cent. But non-defense capital goods orders excluding aircraft fell 2.3 per cent.

''The upside surprise in the headline number was offset by the decline in non-defense aircraft component. So we're seeing a bit of weakness in the dollar,'' said Alex Beuzelin, senior market analyst with Ruesch International in Washington.

But Beuzelin played down the importance of the data, noting that the report is notoriously volatile.

''On balance, the report is not going to detract from the positive news on the U.S. economy and change expectations that the Fed is going to hike rates next week,'' he said.

The euro rose to session highs against the dollar at $1.1987 soon after the U.S. data's release, before trading back down to $1.1961, flat on the day.

The dollar fell to 118.16 yen after the data came out, from about 118.25. The dollar was later at 118.23 yen, still up 0.3 per cent from late on Thursday.

Against the Swiss franc, the dollar was up 0.1 per cent at 1.3186 francs. Sterling was flat at $1.7335.

Later in the session, markets would be watching for data on February U.S. new home sales, which were forecast to slip to a 1.200 million annual pace from 1.233 million a month earlier.

Surprisingly strong U.S. housing data on Thursday bolstered the morale of dollar bulls, adding to upbeat comments on the economy and housing market earlier in the week from Federal Reserve Chairman Ben Bernanke.

The Fed is widely expected to raise rates from 4.50 per cent to 4.75 per cent when its policy-making Federal Open Market Committee meets on Monday and Tuesday. Financial markets are pricing in a roughly 84 per cent chance that the Fed wil raise rates again to 5 per cent at its meeting in May.

REUTERS SD DB1959