FOREX-Dollar scales 16-month highs on cautious BOJ weak China data

* Graphic: World FX rates in 2018 By Saikat Chatterjee

LONDON, Oct 31 (Reuters) - The dollar rose to its highest levels in more than a year on Wednesday as dovish comments by the Bank of Japan and weak data from China reinforced the greenback's attractiveness as an investment destination.

Fuelled by an overnight rally in equities - Japanese stocks are up more than 2 percent - the dollar was set for a seventh consecutive month of gains.

"Eurozone growth figures have been disappointing and the Bank of Japan is striking a dovish stance at a policy meeting today so there is more room for the dollar to gain from current levels," said Paul Bednarczyk, director of G10 FX at Continuum Economics based in London.

Against a basket of its rivals, the dollar rose to 97.07 in Asian trade, its highest since June 2017 and up ten percent from its February lows. It is holding firm against the euro at $1.1356.

It has risen for seven consecutive months as the twin powerful forces of risk aversion in emerging markets and the growing divergence of the strength of the U.S. economy relative to its global peers, especially Europe, has forced investors to buy the dollar.

The euro zone economy grew less than expected in the third quarter, putting pressure on the European Central Bank as it moves towards ending its asset purchase program in December. Meanwhile U.S. consumer confidence rose to an 18-year high in October. and Political uncertainty in Germany, following chancellor Angela Merkel’s decision to step down in 2021, is also pressuring the single currency. Moreover, the stand-off between Rome and Brussels over Italy's free spending budget, which is in breach of the European Union's fiscal rules, has weighed on the euro.

Philip Wee, currency strategist at DBS, said in a note to clients that the gloomy backdrop might push the euro down to $1.12 in the current quarter, and is tipping an even lower $1.05-1.10 range in the first half of 2019.

At a policy decision on Wednesday, the Bank of Japan kept monetary policy steady and slightly trimmed its inflation forecasts as global trade frictions clouded the economic outlook, reinforcing views that the central bank is in no rush to trim its massive stimulus. Sterling held near its mid-August lows, hovering at $1.2705, after credit ratings agency Standard & Poor's said a 'no-deal' Brexit would be likely to tip Britain into a recession on Tuesday. China's official PMI - which gives global investors their first look at business conditions in China at the start of the last quarter of the year - fell to 50.2 in October, the lowest since July 2016 and down from 50.8 in September.

(Reporting by Saikat Chatterjee; Additional reporting by Vatsal Srivastava in SINGAPORE; Editing by Andrew Heavens)

Reuters Messaging: saikat.chatterjee.reuters.com@reuters.net))

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