Dollar falls 1 percent after weak U.S. data cuts Fed rate hike bets

NEW YORK (Reuters) - The dollar tumbled on Tuesday after economic data showed the U.S. service sector grew at its slowest pace since early 2010, which dimmed expectations for a near-term interest rate increase from the Federal Reserve.

The dollar fell at least 1 percent against the yen, euro, Swiss franc, British pound and a number of other currencies, with the pound rising to its highest level against the dollar since mid-July.

The Institute for Supply Management's non-manufacturing purchasing managers' index fell to 51.4 last month, far short of economists' expectations and the largest one-month drop since November 2008.

The poor data took the chances for a September rate hike off the table and had implications for traders' bets on the speed with which the U.S. central bank will raise short-term interest rates in the future, said Fabian Eliasson, vice president for currency sales at Mizuho Corporate Bank in New York.

"I don’t think most people are uncertain that the Fed is going to hike, that is pretty well established," Eliasson said. "The question, because they are forward looking, is 'When is the next hike and how many are you going to have?'"

The Federal Reserve’s labor-market conditions index also fell in August, slipping back into negative territory after a positive reading in July.

The service sector makes up more than two-thirds of the U.S. economy.

Friday's U.S. non-farm payrolls report showed employers in the United States added 151,000 jobs last month, missing economists' expectations and falling well below readings in June and July, which both showed more than 250,000 jobs added in each month.

The dollar fell 1.3 percent against the yen , slipping to 102.05 yen per dollar.

The British pound rose 1 percent against the dollar, touching a fresh seven-week high at $1.3443. The euro rose to $1.1255, its highest since Aug. 26 after the data.

The dollar index <.dxy> dropped 1 percent to 94.821, its lowest since Aug. 26.

The New Zealand dollar rose 1.5 percent against its U.S. counterpart to its highest since May 2015. The kiwi was boosted by the weak U.S. data and a rise in milk prices after a strong dairy auction in New Zealand.

The Australian dollar jumped 1.3 percent against the greenback, bolstered in part by the Reserve Bank of Australia's decision to leave interest rates unchanged at 1.5 percent.

(Reporting by Dion Rabouin; Editing by David Gregorio and Dan Grebler)