Sept 30 (Reuters) - The dollar hovered near its highest level of the year against the euro on Wednesday and was on track for its biggest monthly gain versus the single currency in 14 months, buoyed by stronger US growth and rising interest-rate expectations.
The euro has been one of the worst-performing G10 currencies this year, pressured by Europe's energy and debt worries. The dollar has gained nearly 2.3% against the euro in September, putting it on course for a third consecutive quarterly advance.
A run of data pointing to a resilient US economy and persistent inflation prompted the Federal Reserve to raise interest rates earlier this month for the first time in three years. Traders subsequently priced in a more aggressive path for US monetary policy relative to the euro zone, where growth remains weaker and debt concerns are mounting.
Some of that hawkish Fed pricing eased on Wednesday after New York Fed President John Williams said there was "no need for urgency" in raising rates, while French data showed consumer inflation accelerated more than expected in September.
The euro edged up to $1.135 but remained close to the May 2025 low touched in the previous session. It was also testing support near 178 yen .
"I would still regard the current dollar strength as rather fragile, not least because it already appears over-stretched even relative to developments in the euro area-US interest rate differential," said Thu Lan Nguyen, an FX analyst at Commerzbank.
Key drivers for the euro will be expectations for Federal Reserve and European Central Bank policy. ECB President Christine Lagarde's comments earlier this week were seen as pushing back against the prospect of consecutive rate hikes.
Options markets have increasingly reflected demand for protection against further euro weakness in recent sessions.
DATA IN SPOTLIGHT
Sterling edged up from a three-month low and was last at $1.3265 after data showed the British economy grew faster than previously estimated in the second quarter.
Investors are awaiting economic data on both sides of the Atlantic, including German inflation figures for September and the Fed's preferred inflation measure, the Personal Consumption Expenditures index, for August.
Traders have cut expectations for a 25-basis-point Fed rate increase next month to about 44%, from around 70% earlier this week, according to CME Group's FedWatch tool. Markets also expect the ECB to keep rates unchanged in October, according to LSEG data.
The dollar has strengthened against most major currencies this month, supported by Treasury yields that have climbed to multi-year highs.
It was trading near a 17-month high against the Swiss franc at 0.8333 francs. The franc has come under pressure as investors seek alternative low-yielding funding currencies to the yen for carry trades.
The yen has become a less attractive funding currency following Japan's yen-buying intervention in July, repeated warnings from Japanese authorities against excessive currency moves, and an acceleration in domestic rate hikes.
The dollar has fallen 1.7% against the yen in September and nearly 3.4% over the third quarter.
Reporting by Tom Westbrook in Singapore and Johann M Cherian in Bengaluru; Editing by Kevin Buckland and Mark Potter
