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FOREX-Dollar gains vs euro and yen in year-end shift

Published 12/18/2009, 01:19 PM
Updated 12/18/2009, 01:21 PM

* Year-end, safe-haven flows boost dollar

* Hopes for more robust U.S. recovery also help

* Euro/dollar falls below $1.4300

* Swiss franc stronger vs dollar and euro (Recasts, updates prices, adds comment, changes byline)

By Steven C. Johnson

NEW YORK, Dec 18 (Reuters) - The dollar rose broadly on Friday and was on track for its biggest weekly gain against the euro since April as investors who sold the U.S. currency aggressively in 2009 bought it back as year end approached.

The euro fell below $1.43 for the first time since early September, flushing out short dollar trades, while the dollar rose for a fourth consecutive day against the Japanese yen.

Signs of improvement in the U.S. economy have helped the dollar in recent days, as did the Federal Reserve's pledge this week to wind down most emergency lending by February, lifting hopes of a more robust U.S. recovery in 2010.

The dollar and Swiss franc also attracted safe-haven flows Friday after Iraq said Iranian soldiers had crossed into its territory and raised the Iranian flag at an oil field whose ownership is in dispute; Tehran denied the report.

Traders said all these factors encouraged a bout of position squaring, with investors buying back the dollar and taking profits on trades that had helped push the U.S. currency down more than 15 percent between March and November.

"There's a winding down of activity into year end, with people taking profits on core trades," said Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston. "But the dollar has been well-supported lately, and given the positive surprises in U.S. data lately, people are looking at the U.S. recovery story now as a glass half full."

Strong jobs and consumer data have some betting the Fed may raise interest rates sooner than expected in 2010, which would increase the appeal of dollar-denominated assets.

The euro fell as low as $1.4262, its lowest level since Sept. 4, and was last down 0.3 percent at $1.4308. It had risen to a 16-month high above $1.51 in November.

This week, the euro was down 2.2 percent, its worst slide since April. Fiscal woes in Greece, which had its credit rating cut by two ratings agencies recently, have hurt the euro, too.

The dollar hit a six-week high against the yen near 91 yen and last changed hands at 90.60 yen, up 0.8 percent,

The Bank of Japan kept interest rates steady as expected, but in a surprise move changed its definition of long-term price stability, saying it would not tolerate zero inflation or falling prices.

Sterling fell 0.4 percent to $1.6102 after earlier hitting a two-month low.

IRAQ WORRIES LIFT SWISS FRANC

The Iraq worries and rumors of a coup in Pakistan that were quickly denied pushed the dollar down against the Swiss franc, falling 0.4 percent to 1.0430 francs.

The euro shed 0.6 percent to 1.4938 francs, taking it below the perceived threshold of 1.50 francs at which investors suspected the Swiss National Bank would intervene to weaken the franc. The SNB sold francs to fight deflation earlier this year.

Some analysts said modest improvement in the Swiss economy may mean the SNB is less eager to intervene in the market.

The euro's weekly slide against the dollar was its third in a row, and analysts said worries about finances in some euro zone countries was partly to blame.

But BNY Mellon's Shankar said investors may reenter positions in assets and currencies that offer higher returns than the dollar, which could renew pressure on the dollar.

"We are fully expecting at least some renewed forays into higher-yielders, so we'll have to wait until next year to see how this all plays out," he said. (Additional reporting by Nick Olivari and Gertrude Chavez-Dreyfuss; Editing by Leslie Adler)

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