FOREX-Dollar weakens, keeps euro underpinned near recent highs

Reuters

* Dollar index falls, lending support to the euro

* Yen near 4-yr low vs euro, 5-yr vs GBP, 23-yr low vs Swiss

* Euro also helped by rising short term money market rates

By Anirban Nag

LONDON, Nov 26 (Reuters) - The dollar fell against a basketof currencies on Tuesday, as lower U.S. yields drove investorsto trim long bets and gave a fillip to the euro that has so farproven resilient to talk of looser monetary policy.

Expectations that month-end rebalancing flows by assetmanagers could also see the dollar weaken against currenciesincluding the euro and the British pound.

The dollar index was down 0.2 percent at 80.750,reversing Monday's gains and pulling away from last week's highof 81.29 as U.S. 10-year Treasury yields slipped after data on Monday showing contracts to buy previously ownedU.S. homes hit a 10-month low in October.

The euro was up 0.2 percent at $1.3550, having hit asession high of $1.35715 and triggering stop loss buy ordersabove $1.3560. Near-term resistance is at its Nov. 20 high of$1.3584.

"The dollar's own issues about whether Fed tapering willtake place or not make the euro the next best alternative," saidDaragh Maher, currency strategist, at HSBC. "But the euro islooking rather toppish here."

Part of the reason for the euro holding up is somespeculation that euro zone inflation, due later in the week,could show a slight rise in prices. That would push backexpectations that the European Central Bank will take furtheraction to fight disinflationary pressures in the near term.

Forecasts are for November euro zone flash inflation at 0.8percent, year-on-year, up from 0.7 percent in October. Last month, after a shock drop in inflation, the ECB cut ratesto a record low, pushing the euro to a near two-month trough.

"Inflation readings are starting to have a much greaterimpact on currencies than before," added HSBC's Maher.

Also with excess liquidity in the euro zonebanking system dwindling to its lowest level since September2011, short term market rates are climbing and helping the euro.

The euro was trading near a four-year high against the yenat 137.45 yen.

But the dollar was down 0.3 percent at 101.405 yen,having pulled away from a six-month high of 101.915 yen hit onMonday after the housing data. The data raised questions aboutthe 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 takenprofits in our long dollar/short yen position," said YujiroGato, currency strategist at Nomura. "Dollar/yen should betrading in a 100-102 range in the next five weeks with a drop to100 and below a good level to go long on the dollar again."

Gato added new Japanese investment rules could also see somebuying of the yen against the dollar and other major currenciesby retail investors in the short term.

However, in the longer term the yen will stay weak onexpectations the Bank of Japan's commitment to an ultra-easypolicy will keep it the best funding currency for carry trades,especially against European currencies.

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