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FOREX-Euro hits 7-week high, dollar hampered by soft data

* U.S. manufacturing, housing data disappoint investors

* Yield gap between U.S. and German bonds lower over week

* Yen rebounds after Tuesday's losses

By Laurence Fletcher

LONDON, Feb 19 (Reuters) - The euro touched a seven-week high against the dollar on Wednesday, with the greenback struggling in the wake of more soft economic data and news that foreign investors had been heavy sellers of U.S. assets.

The euro rose as high as $1.37735 during Asian trading, its strongest level since January 2, and was last trading flat at $1.3757, 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 Wednesday's release of minutes from its January policy meeting when it 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 down 0.1 percent on the day at 79.966.

"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."


Perhaps even more telling for the long run, 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 in 2013, 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 0.2 percent lower against the Japanese currency at 102.16 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 0.2 percent at 140.55 yen.

Dealers are also keeping a close eye on China's central bank after it drained funds from the money market on Tuesday.

The People's Bank of China (PBOC) is trying to engineer a gradual upward shift in the cost of money to encourage companies to deleverage and discourage high-risk shadow banking activity.

Investors are anxious in case the tightening goes too far and hurts economic growth, concerns that have periodically put pressure on currencies across the Asian region.

The Australian dollar, whose economy is closely linked to China's, was a tad lower at $0.9021 after recent gains.