FOREX-Dollar powers on after biggest quarterly rise since June 2018

* Graphic: World FX rates in 2019

LONDON, Oct 1 (Reuters) - The dollar held at a 29-month high on Tuesday as renewed evidence of strength in the U.S. economy encouraged investors to buy the greenback.

With rate cuts in Australia, final PMI readings in Europe at seven-year lows and weak confidence readings in Japan, hedge funds pushed the dollar higher after it scored its biggest quarterly gain since June 2018.

On Tuesday, a September survey showed euro zone manufacturing activity had contracted the most in almost seven years.

Germany’s September CPI data rose less than expected, suggesting euro zone inflation was losing momentum and the region’s economy was not improving, despite a large dose of stimulus from the European Central Bank last month.

“The economic divergence trade between Europe and the U.S. has become even stronger, and unless there is a clear sign of a slowdown in the U.S. economy, the dollar is expected to stay on a strong footing,” said Commerzbank analyst Thu Lan Nguyen.

Against a basket of other currencies, the dollar rose 0.2% to 99.58, its highest since May 2017. The next target for the dollar is the January 2017 high of 103.82.

Economic surprise indexes published by Citigroup for the United States and Europe showed an increased divergence. The former is at its highest in nearly two years; the latter has fallen to a 2019 low.

The weakness in economic indicators wasn’t confined to Europe. Japanese big manufacturers’ business confidence worsened to a six-year low in the July-September quarter, the Bank of Japan’s closely watched tankan survey showed.

Further evidence of the strength of the U.S. economy will come from September manufacturing PMI and ISM and September auto sales data due later on Tuesday.

Elsewhere, the Australian dollar was the main underperformer in the G10 after the Reserve Bank of Australia cut interest rates and expressed concern about job growth.

The Australian dollar fell 0.7% to $0.6700 after the RBA cut its cash rate to a record low of 0.75%, as expected.

The New Zealand dollar fell to a four-year low of $0.6238 , as weakening business confidence bolstered expectations for monetary easing.

Reporting by Saikat Chatterjee, editing by Larry King