* Strong U.S. economic data pushes up dollar
* Weaker euro keeps ECB policy outlook in focus
* Spain in spotlight as Catalonia set for general strike
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Dhara Ranasinghe
LONDON, Oct 3 (Reuters) - Borrowing costs across the euro zone nudged higher on Tuesday as strong U.S. data reinforced expectations of another interest rate rise this year by the Federal Reserve.
Southern European bonds continued to underperform given political tensions in Spain after Sunday’s independence vote in Catalonia was marred by police violence.
Markets were calmer after sharp selloff on Monday, but the U.S. rates outlook kept the overall mood bearish.
The U.S. Institute for Supply Management index, released on Monday, rose to 60.8 in September, from 58.8 in August, exceeding analyst expectations. The components of the index showed gains across the board.
U.S. construction spending rebounded in August after two straight months of declines, boosted by increases in both private and public outlays.
The data helped boost the dollar, pushing the euro to a 1-1/2-month low of $1.1694.
A weakening in the single currency is seen as a headwind for bond markets since it could encourage the European Central Bank to press ahead with plans to unwind its massive stimulus scheme.
The euro, up around 12 percent against the dollar this year, has complicated the ECB’s plans for exiting the 2.3 trillion euro asset purchase programme because a strong currency puts downward pressure on inflation.
Most bond yields were 1-2 basis points higher in early Tuesday trade. Germany’s benchmark 10-year yield was up 1 basis point at 0.46 percent.
Spain’s 10-year yield was up almost 2 bps at 1.70 percent , keeping the gap over German peers close to its widest in around four months.
Relatively calm market conditions could encourage the ECB to extend its asset purchase scheme for a relatively longer period but with reduced monthly spending, ECB chief economist Peter Praet said on Monday.
“People are still watching what the Fed is doing and in Europe, how the ECB will act,” said Benjamin Schroeder, senior rates strategist at ING. “There is a sense that officials will tread more carefully.”
Analysts said data on ECB bond buying, due out later in the day, was expected to be scrutinised closely for signs on how close the central bank is to hitting its self-imposed limits for bond purchases.
A scarcity of eligible debt for quantitative easing is one reason why many economists anticipate ECB tapering early next year.
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Reporting by Dhara Ranasinghe; editing by John Stonestreet