By Nick Olivari NEW YORK (Reuters) - The dollar climbed against a basket of major currencies for the second straight day on Tuesday as positive U.S. economic data prompted investors to return to the theme that the U.S. will be at the forefront of a global economic recovery. That would make help push up U.S. interest rates and make U.S. assets more attractive, boosting demand for the dollars to buy them. Sales at U.S. retailers rose at their fastest pace in three-and-half years in August as government-sponsored auto incentives buoyed demand for motor vehicles, according to data on Tuesday that showed sales outside the auto sector also were strong. U.S. producer prices rose more than twice as much as expected in August on the biggest surge in gasoline prices in more than 10 years and prices declined less than expected compared with a year ago, a government report showed on Tuesday. "There is no question of this being positive data, even though the cash-for-clunkers program was a huge part of it," said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon in New York. "It's consistent with the story that the economy has bottomed though not yet in a position for fiscal and monetary stimulus to be removed" But investors are looking toward the removal of the stimulus, leading to higher interest rates which would be good for the dollar, Woolfolk said. The dollar index, which measures the dollar's value against a basket of currencies, rose 0.2 percent to 76.867 .DXY, staying above a one-year low of 76.457 hit last week. The euro was last at $1.4589, down 0.2 percent on the day. Against the yen, the dollar rose 0.5 percent to 91.37 yen, pulling away from a seven-month low hit on Monday. "What will dictate where we go in terms of dollar/yen and potentially more broadly for the dollar is how the data pans out in the United States," said Derek Halpenny, European head of global currency research at Bank of Tokyo Mitsubishi-UFJ. "We should have a clear picture in terms of Q3 GDP by the end of this week. That will potentially dictate movements in yields at the short end of the curve and potentially offer some support for the dollar," said Derek Halpenny, European head of global currency research at Bank of Tokyo Mitsubishi-UFJ in London. POUND UNDERPERFORMS Sterling underperformed after Bank of England Governor Mervyn King said the central bank was looking at reducing the rate on commercial banks' reserves, fueling speculation of further quantitative easing. Sterling was down 0.7 percent on the day to $1.6454 after King's comments which fueled speculation that the BoE may use yet another device in its quantitative easing toolkit. The pound erased earlier gains made against the dollar after stronger than expected British house prices and a smaller-than-expected fall in inflation.

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