FOREX-Dollar hits 7-week low vs euro ahead of Fed minutes

* Focus on Fed minutes after weak U.S. data

* Overseas investors sold $120 bln of U.S. assets in Dec

* Yen rebounds after Tuesday's losses

By Laurence Fletcher

LONDON, Feb 19 (Reuters) - The dollar hit a seven-week low against the euro on Wednesday and its lowest level this year against a basket of currencies, weighed down by soft U.S. data ahead of the release of minutes from the Federal Reserve's latest meeting.

The euro rose as high as $1.37735 during Asian trading, its strongest level since January 2. The dollar later gained ground, leaving the euro last trading down 0.1 percent at $1.3744, with equity markets offering investors little direction.

Tuesday's New York manufacturing and U.S. housing data were the latest numbers out of the United States to disappoint investors, increasing pressure on the dollar.

The numbers bolstered the case for the Federal Reserve to be patient in its tapering of its huge bond-buying programme, ahead of the minutes from the January policy meeting when the Fed opted to trim asset buying by another $10 billion.

The data also pushed Treasury yields lower, with the yield spread between 2-year Treasuries and German 2-year Bunds down over the past week offering less support to the greenback.

Against a basket of major currencies, the dollar index fell as low as 79.927, its lowest level this year, before recovering to trade up slightly on the day at 80.044.

"It (the weak U.S. data) is certainly in the background. There's been a period of nearly three weeks where U.S. data has come in pretty consistently below expectations," said Simon Smith, FxPro's head of research.

"It's not as obvious as previously that saying the Fed would taper quantitative easing ... is decidedly dollar bullish."

Nevertheless, most strategists still expect the Fed to keep tapering, barring a major economic shock, although some think QE could continue into next year, driven by the need to keep economic growth going.

"Our economists expect today's FOMC minutes to ... (say) that the tapering process remains on track and is unlikely to be interrupted barring a significant shock to the economic outlook," said Adam Cole, head of G10 FX strategy at RBC Capital, in a note.

"In other words, a $10 billion reduction per meeting should be everyone's base case."

The Canadian dollar hit a one-month high at C$1.0911 per U.S. dollar. The loonie has been a favourite short bet for hedge funds in recent months, and while the recent rally has been painful for managers, many have still made money on their bet.

EQUITY FLOW GAP

Meanwhile, Treasury figures showed overseas investors had sold almost $120 billion of U.S. assets in December.

Alan Ruskin, global head of G10 currency strategy at Deutsche Bank in New York, noted that the net outflow from U.S. equities over 2013 has amounted to a huge $214 billion.

In contrast, the euro zone attracted inflows into stocks of 111 billion euros. At the same time, the euro zone enjoyed a record current account surplus of 216 billion euros while the United States ran up a deficit of almost $400 billion.

"That the euro was the strongest major currency in 2013 is easily - with all the benefit of hindsight - explained by this current account and equity flow gap," Ruskin said.

"For USD strength to broaden and also encompass the euro, a turn in the 'equity gap' is one precondition."

The yen rebounded from Tuesday's falls, which were prompted by the Bank of Japan's decision to extend and expand a scheme to promote bank lending.

The dollar was 0.4 percent lower against the Japanese currency at 101.93 yen, with options expiries at the 101.50 and 102 yen levels, said one London-based trader.

Betting on dollar-yen was one of the biggest hedge fund trades for the start of 2014, and with the dollar having finished last year at 105.275 yen the trade is now showing sizeable losses.

The euro was also down 0.5 percent at 140.08 yen.