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Friday August 15, 2008 - 11:31:02 GMT
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FOREX NEWS-Dollar rallies, hits 6-mth high vs euro

Fri Aug 15, 2008 7:25am EDT

* Dollar rallies to 6-month high vs euro at $1.4700

* Dollar-led commodity market liquidation feeds gains

* Sterling skids to 2-year lows vs dlr

* Dlr index .DXY powers to 7-month high

(Adds quotes, updates prices, changes byline)

By Ian Chua

LONDON, Aug 15 (Reuters) - The dollar raced to a six-month high against the euro on Friday, propelled by growing worries about the health of the euro zone economy and further lifted by liquidation in commodity markets.

The dollar's rally knocked an already floundering sterling to two-year lows near $1.85 <GBP=>, while the U.S. currency also powered to a seven-month high against a basket of six major currencies .DXY.

"It's not just the U.S. economy that has problems now, it's clearly spilling over to the rest of the world, we saw this yesterday with GDP numbers in Europe ... no one believes the European Central Bank is going to tighten any more and they're moving to price in a rate cut," said Martin McMahon, FX strategist at Credit Suisse in Zurich.

Data on Thursday showed the euro zone economy contracted in the second quarter for the first time in the common currency's lifetime.

"The dollar has also broken through important technical levels. The $1.50 area was the base of the trading range in the past four, five months and now that it's gone through, there's clearly open space in front and the question is how far will euro/dollar ease before it finds support," McMahon added.

By 1043 GMT, the euro was down 0.6 percent on the day at $1.4715 <EUR=>, having earlier touched $1.4700 -- its lowest since Feb. 20.

The dollar was further supported by steep falls in commodity prices, triggered in part by mounting worries about weakening global demand.

Oil CLc1 has fallen more than 20 percent from the all-time high above $147 set in July, while the Reuters-Jeffries/CRB index .CRB, a global index of commodity prices, has slid almost 18 percent from its July peak.

"People have been selling commodities that they funded out of dollars, so they've been needing to cover their commodity positions by buying dollars and that's generated a broad dollar rally," said Chris Turner, head of FX strategy at ING.


The dollar has rallied across the board, rising more than 5 percent against the euro this month alone, as investors shifted their view on the global economy's ability to withstand the U.S. downturn.

Among the key milestones achieved in the past two weeks, the dollar index snapped a three-year downtrend and broke above its 200-day moving average for the first time in 2-1/2 years.

By contrast, sterling looks set for a weekly close below its 200-day moving average around the $1.9020 area, seen by technical analysts as a key bear signal.

The dollar index, which measures the value of the greenback against a basket of six currencies, struck a seven-month high of 77.252. Versus the yen, the U.S. unit reached a 7-1/2 month high of 110.66 yen <JPY=>.

Dollar buying momentum has also been bolstered this week by the Bank of England warning of economic pain ahead and Japan's economy contracting in the second quarter at the sharpest rate in seven years.

On the data front, the Reuters/University of Michigan sentiment survey -- due at 1355 GMT -- is expected to show a reading of 62.0 in August, a slight improvement from 61.2 in July.

"This survey could give some hints (on whether) U.S. consumers are able to drag the economy out of the mud. The market expects a further rise, while we bargain for a weaker confidence (reading). If the survey disappoints the market, EUR/USD will see a moderate recovery ahead of the weekend," said Commerzbank analysts.

Goldman Sachs on Thursday said it was time to let go of its 10-year dollar bearish stance. (Additional reporting by Veronica Brown; Editing by Ruth Pitchford)

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