NEW YORK (Reuters) - The U.S. dollar rallied on Tuesday after a string of healthy economic data boosted near-term rate hike prospects, while Greece's financial crisis and signs of growing opposition to austerity in Spain weighed further on the euro.
Stocks and commodities took a knock, as the greenback pushed higher on a solid increase in a gauge of U.S. business investment spending in April.
Other reports showed U.S. consumer confidence improved this month and house prices extended gains in March, which should boost household equity, support consumer spending, and allow the Federal Reserve to move ahead in its plan to raise interest rates later this year.
The mood in Europe was unsettled as voters in Spain punished the ruling Popular Party in local elections after years of austerity policies. Greece, which has warned it may miss a June 5 debt repayment to the International Monetary Fund, also concerned markets.
Stocks fell 1 percent on Wall Street, weighed by the stronger dollar, which gained 1.3 percent against a basket of major currencies .DXY in its largest daily move since July 5, 2013.
The selling in stocks “is a reaction to a slightly stronger dollar as a result of the continuing saga in Europe,” said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.
"The risk-averse move is purely sentiment-driven, not by the economics."
The Dow Jones industrial average .DJI fell 190.48 points, or 1.04 percent, to 18,041.54, the S&P 500 .SPX lost 21.86 points, or 1.03 percent, to 2,104.2 and the Nasdaq Composite .IXIC dropped 56.61 points, or 1.11 percent, to 5,032.75.
The pan-European FTSEurofirst 300 index .FTEU3 dropped 0.8 percent.
The dollar's move to a one-month high against a currency basket extended a rally triggered by Friday's U.S. inflation data and comments from Fed Chair Janet Yellen that she expected the economy to strengthen. The dollar topped 123 yen to a level last seen in July 2007.
"The dollar is back on a bullish trend," said Ian Stannard, head of European FX strategy with Morgan Stanley in London.
"Dollar yen breaking through the top of the range is an important event."
The Japanese currency remained week late in New York trading, and was last at 123.09 yen per U.S. dollar.
Short-dated U.S. Treasury yields hit two-week highs on continued expectations the Fed would hike rates this year, before flattening out on the day on the view that the Fed will not move too sharply. The longer end tightened with eyes on Europe.
Two-year Treasury notes were last up 1/32 to yield 0.6143 percent. Benchmark 10-year Treasury notes were last up 27/32 in price to yield 2.135 percent, from a yield of 2.229 percent late Friday.
U.S. 30-year prices were last up 2-5/32 to yield 2.8919 percent, from a yield of 3 percent late Friday.
Commodity markets were pressured by the strength in the dollar. Spot silver fell 2.3 percent and spot gold lost 1.6 percent, while copper CMCU3 was down 0.9 percent.
Brent crude LCOc1 was down 2.5 percent to $63.90, further pressured by the possibility that U.S. shale oil producers could increase drilling activity. U.S. crude also fell 2.5 percent.
Additional reporting by Sam Forgione and Michael Connor; Editing by Meredith Mazzilli and Andrew Hay