Dollar dips in London

The dollar fell broadly on Thursday on year-end position adjustment in thin, illiquid trade which prompted exaggerated price movements. Analysts said little could be read into the day's volatile movements and that the jury remained out on whether the dollar will continue its December rally into the new year.
The dollar has rallied in recent weeks as stronger US economic data stoked expectations that the Federal Reserve could start raising interest rates earlier than previously thought, prompting investors to cut short dollar positions. "We could some a partial retracement of December's sharp dollar rally early in 2010, but ultimately further improved US economic data will fuel Fed tightening expectations and support the dollar," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.
Trade was extremely light, with Tokyo and several European countries on holiday and many banks on skeleton staff ahead of the New Year holidays. "We're probably seeing some sort of rebalancing. The dollar has had a strong month and people are just taking profits," said Geoffrey Yu, currency strategist at UBS in London.
At 1215 GMT, the dollar index was down 0.5 percent at 77.501, a big turnaround from the previous session when it rose as high as 78.218. The dollar index has risen around 3.5 percent so far this month and was on track for its biggest monthly gain since January, although over 2009 it was down more than 4 percent.
The euro was up 0.5 percent at $1.4403, taking it well above its December low of $1.4219. However, it was still down around 4 percent over December. The euro jumped well over a cent against the dollar in early London trade, with traders attributing the move to Asian central bank dollar selling as well as year-end model trades.
Technically, the euro's short-term outlook against the dollar was strong entering the new year, after Wednesday's dip confirmed strong support at $1.4117-1.4218 - the 38.2 percent retracement of the rise from the March low, and the 200-day average. Also, the Moving Average Convergence Divergence oscillator, used to gauge turning points in trends, staged a bullish crossover. Any clean break above $1.4434, the 23.6 percent retracement of the euro's drop from December's peak, would target the 38.2 percent retracement at $1.4569.
US PAYROLLS DATA EYED Over the year, the euro was up around 3 percent, although that gain pales compared to the Australian and New Zealand dollars - easily the best performers among the major currencies - which have risen around 28 and 25 percent respectively.
The two currencies gained strongly on Thursday, with the Australian dollar up 0.6 percent at $0.8999 and the New Zealand dollar up 0.7 percent at $0.7269. Next week, investors will turn their attentions to the release of US monthly payrolls data on Friday, where further indications of an improving US economy could lift the dollar.
"It's going to be a hugely important number," said a trader at an Australian bank in Sydney. "Anything above forecast could see the euro finally break down through $1.4200 toward $1.4000. "A weak result would be a real dampener after the run of upbeat figures we've seen. The market would have to rethink the Fed timing again, and that could see the euro back up at $1.4700." Elsewhere, the dollar fell 0.1 percent against the yen to 92.37 yen. But it was up nearly 7 percent over December, on track for its best monthly performance since February.