The dollar held firm near a seven-week high against the euro on Wednesday as traders covered short positions in the US currency before they close their books at the end of the year. The dollar continued to draw support from unexpectedly strong US retail sales and inflation data last week.
This scaled back expectations for aggressive monetary easing by the Federal Reserve next year. The euro, by contrast, was hit by the Ifo German business index which came in below expectations, while the pound fell after it emerged that the Bank of England's MPC voted 9-0 for a rate cut at the December meeting.
Latest positioning data from the Commodity Futures Trading Commission showed $27.2 billion worth of net short bets against the dollar - suggesting there is plenty of room for unwinding as 2007 draws to a close.
"The theme is that risk is trading poorly," said John Noyce, senior technical analyst at Citi. "The dollar is benefiting as it is acting as a funding currency as people are taking short positions off in more volatile markets ahead of year-end."
By 1113 GMT, the dollar was up 0.1 percent against a basket of major currencies at 77.460, edging back up towards Monday's two-month high of 77.804. The euro edged lower to $1.4399, down 0.1 percent on the day and in sight of a seven-week low of around $1.4330 hit earlier this week.
The euro fell 0.36 percent to 162.75 yen, while the dollar was 0.35 percent down at 112.95 yen, with the Japanese currency bolstered by weaker equity markets. "There was no suggestion that hawks had acquiesced to the move to reduce the need for deeper cuts in the move was rightly interpreted bynal," said Calyon in a note to clients.
Following the Fed's first term auction on Monday under a co-ordinated plan among central banks to boost liquidity, the European Central Bank's extension of $500 billion in two-week loans to euro zone banks on Tuesday helped to ease anxiety about a year-end credit squeeze.
Along with the results of the Fed's term auction, investors were awaiting the outcome of this week's liquidity injection plans by other top central banks.
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