By Marc Jones
LONDON (Reuters) - Growing expectations the Federal Reserve will raise U.S. interest rates this year pushed the dollar up for a seventh time in eight days on Tuesday. Stocks rose.
The dollar reached a 2 1/2-week high in against other top currencies in European trading. The pan-regional FTSEurofirst 300 rose 0.5 percent as banking and industrial stocks advanced.
Doubts remain about when U.S. monetary policy will change, especially with an election in November. But both Fed Chair Janet Yellen and Vice Chair Stanley Fischer suggested on Friday the case for a rate increase was strengthening, and Fischer is due to speak later on Tuesday .
"The market is now pricing around a 36 percent probability of a hike in September and it has moved from about 50 to 60 for December, which is considerably higher than a week ago," said Rabobank's U.S.-focused economist, Philip Marey.
"Now we are waiting for the next big thing, which is payrolls (U.S. jobs data) on Friday," he added, saying the first batch of Q3 GDP data at the end of October would be key.
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The focus on U.S. rates put bonds under pressure, with German Bund yields pulled up by 10-year Treasury's rise to 1.5850 percent.
The yield on Italy's 10-year BTP bond rose 1.5 basis points to 1.13 percent before its planned sale of up to 7.75 billion euros of three bonds later. The sales will be the first major test of sentiment since Prime Minister Matteo Renzi staked his future on a referendum on parliamentary reform.
Data from German states suggested inflation was little changed in August from July and around 0.5 percent compared with a year ago, adding to the debate on whether the European Central Bank will continue to cut rates.
BREXIT BRUISES
Bank of England figures showed lending to British consumers slowed in July, the month after Britain voted to leave the European Union. Mortgage approvals dropped to their lowest since January, although tax changes may have distorted the figures.
The Confederation of British Industry said investment plans among services firms, the largest sector of the British economy, were at their lowest in more than four years.
"Looking ahead, the service sector faces a challenging environment in which to grow and invest, with uncertainty about demand weighing on firms' minds," said the CBI's head of economic analysis and surveys, Anna Leach.
The signs of weakness in the economy and the uncertain outlook for U.S. monetary policy led sterling to slip back towards $1.30. The pound has fallen more than 1 percent against the dollar since Friday's comments by the Fed's Yellen and Fischer.
"The BoE's easing bias, softer UK economic data and sterling's role as a funding currency will all keep the bearish ... momentum in place," said ING currency strategist Viraj Patel.
In commodity markets, oil steadied after falling by around 1 percent on Monday. Oversupply remained a major concern, with U.S. crude stockpiles forecast to have risen by 1.3 million barrels last week, a Reuters poll showed.
Brent crude futures were up 17 cents at $49.43 a barrel, U.S. crude added 21 cents to $47.19, while gold slipped 0.2 percent at $1,320.79 per ounce.
(Additional reporting by Wayne Cole in Sydney, editing by Larry King)