FOREX-Dollar slumps, keeps euro underpinned near recent highs

Reuters

* Dollar index falls, lending support to the euro

* Yen near four-year low vs euro, five-year vs GBP, 23-year

low vs Swiss

* Euro also helped by rising short-term money market rates

By Julie Haviv

NEW YORK, Nov 26 (Reuters) - The dollar dropped against a

basket of six major currencies on Tuesday, as lower U.S.

Treasury debt yields drove investors to trim long bets, giving a

fillip to the euro that has so far proven resilient despite talk

of looser monetary policy.

Expectations of month-end rebalancing flows by asset

managers could also see the dollar weaken against currencies

including the euro and the British pound.

The dollar slightly pared losses after data showed permits

for future U.S. home construction rose to their highest level in

nearly 5-1/2 years in October.

Separate data showed U.S. single-family home prices rose in

September and posted their strongest annualized gain in 7-1/2

years.

The dollar index, which is dominated in composition

by the euro, fell to 80.636, its lowest since Nov. 20 and was

last down 0.2 percent at 80.770. The index has fallen as U.S.

10-year Treasury yields have fallen.

"The dollar's own issues about whether Fed tapering will

take place or not make the euro the next best alternative," said

Daragh Maher, currency strategist, at HSBC. "But the euro is

looking rather toppish here."

The euro was up 0.1 percent at $1.3528, having hit a

session high of $1.3571 and triggering stop loss buy orders

above $1.3560. Near-term resistance is at its Nov. 20 high of

$1.3584.

Part of the reason for the euro holding up is some

speculation that euro zone inflation, due later in the week,

could show a slight rise in prices, pushing back expectations

that the European Central Bank will take further action to fight

disinflationary pressures in the near term.

Forecasts are for November euro zone flash inflation at 0.8

percent, year-on-year, up from 0.7 percent in October.

Last month, after a shock drop in inflation, the ECB cut rates

to a record low, pushing the euro to a near two-month trough.

"Inflation readings are starting to have a much greater

impact on currencies than before," added HSBC's Maher.

Also with excess liquidity in the euro zone

banking system dwindling to its lowest level since September

2011, short term market rates are climbing and helping the euro.

The euro was trading not far from a four-year high against

the yen at 137.34 yen.

The dollar, however, eased 0.1 percent at 101.54 yen,

pulling away from a six-month high of 101.91 yen hit on Monday

after data showed contracts to buy previously owned U.S. homes

hit a 10-month low in October.

The data raised questions about the economic recovery,

prompting profit-taking in the dollar, which had gained 1.9

percent versus the yen in three sessions.

"Short yen positions appear stretched and we have taken

profits in our long dollar/short yen position," said Yujiro

Gato, currency strategist at Nomura. "Dollar/yen should be

trading in a 100-102 range in the next five weeks with a drop to

100 and below a good level to go long on the dollar again."

Gato added new Japanese investment rules could also see some

buying of the yen against the dollar and other major currencies

by retail investors in the short term.

However, in the longer term the yen will remain weak on

expectations the Bank of Japan's commitment to an ultra-easy

policy will keep it the best funding currency for carry trades,

especially against European currencies.

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