(Adds details, updates prices)
By Lucia Mutikani
NEW YORK, Jan 9 (Reuters) - The dollar rose on Wednesday, shrugging off worries of a U.S. recession, as investors started to focus on a potential growth slowdown in the euro zone after gloomy German industrial output and retail data.
A slower pace of expansion in the common monetary area would force the European Central Bank to abandon its hawkish inflation rhetoric, denting the euro, analysts said.
"Markets are starting to price in problems for the euro. We saw further weak data out of Germany today that further fueled that type of bet,' said David Gilmore, partner at FX Analytics in Essex, Connecticut.
"Markets had plenty of time to price in bad news for the U.S. and even a recession and are yet to price in much of any problem for the European economy. Markets are starting to realize the notion of decoupling is not going to be valid."
German industrial output, exports and retail sales all fell in November, heightening concerns about the outlook for growth in Europe's largest economy. For details, see [ID:nL09500491].
In late trade, the euro was down 0.3 percent at $1.4661 <EUR=>, after dipping to a session low of $1.4640. A late rally in the U.S. stock market, as investors picked up beaten down shares, pushed the dollar to an intraday peak of 109.94 yen <JPY=>.
It was last trading at 109.82 yen, up 0.8 percent on the day. That jump versus the Japanese currency helped lift the New York Board of Trade's dollar index 0.4 percent to 76.448 .DXY.
"People are playing the yen against the stock market. It's just hard to get a gauge of how much liquidity is out there and how true this move is, given the fact that this move has happened near the end of the day," said Brian Taylor, chief currency trader at M&T Bank in Buffalo, New York.
"When the market opens in Asia we may some yen strength, just a little bit."
INVESTORS RELUCTANT TO SELL DOLLAR
Analysts said the dollar's resilience in the wake of December's dismal jobs report had left some investors reluctant to keep selling it and instead they started betting on its retracement against the euro. The euro appreciated nearly 10 percent versus the dollar last year.
The dollar's gains on Wednesday came even as Federal funds futures were pricing in a roughly 80 percent chance of a half percentage point reduction in the Fed's benchmark overnight lending rate to 3.75 percent at month end, while a 25 basis point cut has been fully factored in.
"The sentiment seems to be that aggressively cutting interest rates now is necessary, and the sooner the cuts, the sooner the U.S. economy will be on the road to recovery, perhaps in the second half of this year," said Paul Lennox, corporate treasurer at Custom House in Victoria, British Columbia.
"Many analysts are calling for a stronger dollar in the second half of the year and traders seem to be thinking selling dollars now is not the high probability one-way bet it was last year," Lennox wrote in a note to clients.
Investors, however, remained cautious ahead of Thursday's speech on the U.S. economy by Federal Reserve Chairman Ben Bernanke, keeping the price action confined to tight ranges.
Sterling, meanwhile, hit a record low against the euro and a nine-month trough against the dollar as renewed fears about the British retail sector stoked expectations of a UK interest rate cut.
The euro rose 0.4 percent against the British pound to 74.87 pence <EURGBP=>, having reached a record post-1999 launch peak of 75.03 pence.
Sterling fell 0.7 percent against the dollar to $1.9576 <GBP=>, trading as low as $1.9555, the lowest level since late March. The pound was knocked after Britain's largest clothing retailer, Marks & Spencer (MKS.L: Quote, Profile, Research), reported unexpectedly weak fourth-quarter sales.
The ECB will hold a monetary policy meeting on Thursday and is widely expected to hold interest rates steady at 4.0 percent. Markets will closely watch comments from ECB President Jean-Claude Trichet, given a spate of weak economic euro zone numbers. (Editing by Leslie Adler)