* Dollar dips vs euro as Dubai gets lifeline
* Sovereign risk issues still causing concern in market
* Yen initially sold on position squeeze, recovers losses
* Fed policy meeting coming into focus
(Recasts, updates prices, adds comment)
NEW YORK, Dec 14 (Reuters) - The euro edged up against the dollar on Monday as Abu Dhabi's decision to throw neighboring emirate Dubai a $10 billion lifeline to repay debts slowed safe-haven buying that boosted the U.S. currency last week.
Abu Dhabi's move prompted investors to sell the dollar and buy stocks on improved risk appetite, even as lingering concerns over debt woes outside Dubai capped euro gains.
The dollar's fall was in contrast to last week, when strong U.S. economic data boosted risk-taking, to the benefit of stocks and the dollar.
Analysts cautioned however, not to read too much into Monday's market gyrations, with any hint the U.S. Federal Reserve will hike interest rates sooner rather than later, likely to send the dollar higher.
The Federal Reserve meets later this week and may give clues on how it intends to unwind 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 suggestion 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 $1.4650
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 in London.
A European Central Bank board member said Monday Greece needs to ensure it improves its rating by the end of 2010. [ID:nLDE5BD0AF]
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 0.5 percent to 88.63 yen
Traders cited Japanese exporters selling the greenback after its rise. The dollar index, a non-traded calculation which measures the dollar's performance against six currencies, fell 0.3 percent Monday to 76.343 <.DXY>.
Last Friday, the dollar index hit its highest since November 3.
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) (Reporting by Nick Olivari and Steven C. Johnson; Editing by Andrew Hay)