* Dollar dips vs euro as Dubai gets lifeline
* Yen initially sold on position squeeze, recovers losses
* Sovereign risk issues still causing concern in market
* Fed policy meeting coming into focus, dollar could gain
(Recasts, updates prices, adds comment)
By Steven C. Johnson
NEW YORK, Dec 14 (Reuters) - The euro edged up against the dollar on Monday as Abu Dhabi's decision to throw neighbor Dubai a $10 billion lifeline to repay debts slowed safe-haven buying that boosted the U.S. currency last week.
The emirate's move initially prompted investors to sell the dollar and push up global equities on improved risk appetite.
That was in contrast to last week, when strong U.S. economic data boosted risk-taking, to the benefit of stocks and the dollar.
The dollar could strengthen this week if investors see signs the U.S. Federal Reserve will hike interest rates sooner rather than later due to economic recovery.
Lingering worry over debt woes outside Dubai capped euro gains on Monday. Investors were cautious ahead of a Federal Reserve meeting later this week that may give clues on how the central bank intends to exit loose monetary policy.
"Abu Dhabi helped risk-taking overnight, and that hurt the dollar, but we're at an interesting point heading into the Fed meeting," said Dan Cook, senior analyst at IG Markets in Chicago. "(Fed Chairman Ben) Bernanke has said rates will stay low, but people are starting to think the Fed at some point will have to consider raising them."
The Fed isn't expected to change rates from their current level near zero on Wednesday, but Cook said any hint that leaves markets thinking a rate hike could come sooner than mid-year would likely lead to a dollar rally.
While the dollar has a safe-haven appeal, it also gains on expectations of higher U.S. interest rates, that boost the value of dollar-based assets.
The euro rose 0.2 percent to $1.4644, having climbed to $1.4685 after Dubai said it had received funding to help repay $4.1 billion in an Islamic bond maturing on Monday. Last week it hit a two-month low beneath $1.4586 on the EBS trading platform on the back of strong U.S. consumer data.
Last week, worries about excessive debt in Greece, which had its sovereign credit rating cut by Fitch, weighed on the euro, and analysts said these worries had not gone away.
"The market's reaction to the Dubai news was relatively positive, but there remain question marks relating to the broad issue of sovereign risk, which will be one of the themes going into 2010," said Ned Rumpeltin, currency strategist at Nomura.
A European Central Bank board member said Monday Greece needs to ensure it improves its rating by the end of 2010.
YEN RALLIES, DOLLAR FUNDAMENTALS EYED
Abu Dhabi's bailout announcement also triggered selling in the low-yielding yen. But the initial dollar and yen weakness fizzled, and traders cited talk of Japanese yen repatriation.
The dollar fell 0.4 percent to 88.70 yen, unable to sustain a jump to around 89 yen after Dubai's announcement. Traders cited Japanese exporters selling the greenback after its rise. The dollar index, which hit a six-week high last week, fell 0.2 percent Monday to 76.396.
Recent stronger-than-expected economic reports on U.S. employment and retail sales have bolstered the view that the Fed may have to act sooner than expected.
Investors were also watching to see whether a year-long trend in which the dollar weakens on strong U.S. data was starting to break down.
For most of the year, investors sold dollars on signs of U.S. growth because they were betting U.S. interest rates would nonetheless stay low well into 2010, making other currencies and higher-yield assets such as stocks more attractive.
Alan Ruskin, chief international strategist at RBS Securities in Greenwich, Connecticut, said strong readings on U.S. retail sales and jobs may well boost the dollar.
But on days with little new economic news, he said "we will revert back to trading off the dollar's relationship with risk, but with the caveat that there will be much less exuberance to buy the euro as a default on positive risk appetite days."
(Additional reporting by Jamie McGeever and Naomi Tajitsu in London, Editing by Andrew Hay)