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By Toni Vorobyova
LONDON, Dec 18 (Reuters) - The dollar held near a two-month high against major currencies on Tuesday ahead of key U.S. housing data which could halt its rise if a weak outcome shifts investor focus back onto a slowing U.S. economy. Traders said volumes were thin as investors scaled down their activity into the end of the year, leading to jittery trading heavily influenced by technical factors and flows.
The dollar has benefited over the past week from stronger-than-expected data on retail sales, inflation and capital inflows into the United States.
Together, the releases have slightly dampened expectations for future Fed easing, although markets are still almost fully pricing in a move in January FEDWATCH.
However, the run of strong data -- and thus possibly positive dollar sentiment -- is likely to be broken by the 1330 GMT release of U.S. November housing starts.
"It's likely to show that the housing market is still in a recession and that could put pressure on the dollar," said Teis Knuthsen, head of FX research at Danske Markets in Copenhagen.
"We think this (current dollar strength) is a traditional technical correction ... and the dollar is likely to weaken again as combination of lower growth in the U.S. and higher inflation bodes ill for the dollar going into the beginning of 2008."
By 1150 GMT, the dollar index, which measures its strength against a basket of six major currencies, was steady on the day at 77.436 .DXY, having hit a two-month high on Monday.
The euro was steady at $1.4408 <EUR=> while the dollar was up 0.4 percent at 113.32 yen <JPY=>. The euro was up 0.4 percent at 163.25 yen <EURJPY=>.
The high-yielding Australian dollar <AUD=> gained 0.6 percent to US$0.8623. It drew support after minutes from the Reserve Bank of Australia's December policy meeting showed it saw strong reasons for raising interest rates, although it held off from doing so because of the global credit squeeze.
Sterling meanwhile, sold off broadly <GBP=> after UK inflation data came in below expectations, leaving the door open for more Bank of England rate cuts in 2008.
LIQUIDITY AND HOUSING
U.S. building permits are seen falling to an annual pace of 1.15 million in November from 1.17 million the previous month, while housing starts ease to 1.18 million from 1.23 million.
Investors are also awaiting the outcome of this week's liquidity injection plans by top central banks. The Bank of Canada and the Bank of England are following central banks in Switzerland, the euro zone and the United States later in auctioning funds.
The results of the liquidity measures are due on Wednesday.
"While this is a positive message for markets, the scepticism surrounding the effectiveness of the coordinated liquidity measures by central banks continues to grow," Barclays Capital said in a research note.
The ECB allotted 348.6 billion euros in two-week funds on Tuesday, having said the previous day it would accept all bids of at least 4.21 percent at the weekly auction.
Cheered by the prospects of such allocation, two-week Euribor interbank rates <EURIBOR2WD=> fixed sharply lower ahead of the auction, but still well above the ECB's benchmark rate. (Editing by Mike Peacock)