* Euro falls below $1.49, worst day since August 7
* Wall Street falls on speculation over end of tax credit
* Dollar index posts best daily gain since late September
* China should increase euro, yen holdings -- report (Updates prices, adds comment, detail)
By Wanfeng Zhou
NEW YORK, Oct 26 (Reuters) - The U.S. dollar rose broadly on Monday, rebounding from a 14-month low against the euro as falling stock and commodity prices prompted investors to lock in recent gains in other currencies.
Traders were also reluctant to push the euro higher given the huge amount of bearish trades on the dollar, which suggests a near-term rebound in the U.S. currency could be on the horizon.
U.S. stocks fell sharply as financial shares tumbled on concern that a federal tax credit for U.S. home buyers might be phased out, while oil prices fell more than 2 percent. For details, see [ID:nN26196363]
"You do have an overall reversal in risk appetite," said Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston.
"It's primarily a lot of profit-taking on long risk positions and some hesitation on the part of market participants ahead of the (third-quarter U.S. gross domestic product) number that's going to come out this week," he added.
In late New York trading, the euro traded down 0.9 percent
at $1.4863
U.S. lawmakers are working on a proposal to phase out the tax credit for first-time homebuyers over 13 months, according to a note from research group ISI Group Inc. [ID:nN26194506]
It was a turnaround for the dollar, which struggled earlier partly due to a report saying China should increase its holdings of euros and yen in its foreign reserves.
Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York, said the euro peaked after the Chinese diversification story and that its failure to make new highs triggered selling, which accelerated after stops were hit.
"Today's price action is inflicting technical damage on the euro chart," he said. He added the next level of support for the euro is seen near $1.4830 to $1.4840 and a convincing break of that area would open the way to $1.4675.
SHORT DOLLAR TRADE
The ICE Futures dollar index <.DXY>, a gauge of the greenback's performance against six other major currencies, was up 0.7 percent, the best daily gain since Sept. 24. The index hit a 14-month low last week.
Against the yen, the dollar rose 0.1 percent to 92.18
Analysts said the heavy short positioning on the dollar has hovered in the background, making investors hesitant to sell more dollars despite the currency's weak fundamentals.
Data on Friday showed currency speculators increased bets against the greenback, with the dollar's net short position rising to $18.65 billion in the week ending Oct. 20 from a $17.99 billion net short the prior week. [ID:nN23573397]
Earlier, an opinion piece in China's Financial News, a paper published by the People's Bank of China, said the dollar should remain the principal currency in China's foreign exchange reserves but that the share of euros and yen should increase. [ID:nPEK285229]
Commodity-linked currencies declined as oil fell to below $79 a barrel on concerns over a sluggish economic recovery.
The U.S. dollar rose 1.2 percent against the Canadian
dollar
Canada's central bank governor Mark Carney on Monday repeated concerns about the adverse impact of a strong currency on the economy. [ID:nBAC002343]
Monday was a quiet day for economic data and focus is likely to center on events later in the week, including a first look at U.S. gross domestic product data for the third quarter and interest rate decisions in Norway and New Zealand. (Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Chizu Nomiyama)