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Tuesday September 23, 2008 - 09:35:04 GMT
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FOREX NEWS-Dollar claws up; US bailout concerns seen weighing

Tue Sep 23, 2008 5:27am EDT

* Dollar fights back from one-month low against euro <EUR=>

* Further dollar falls seen as US plan hits bumps in Congress

* Euro area in focus; manufacturing sector contracts

* Risk aversion high as stock markets extend falls

(Changes dateline, byline, adds quotes, updates prices PVS TOKYO)

By Veronica Brown

LONDON, Sept 23 (Reuters) - The dollar clawed back ground against euro on Tuesday after suffering its biggest one-day loss since the single currency's inception, but worries about a $700 billion U.S. bank bailout package was seen limiting its rebound.

While problems in the United States were the main focus, weakness in the euro zone's manufacturing sector drove the euro back from one-month highs set against the dollar in the previous session.

The dollar's sharp dive on Monday was exacerbated by a sharp surge in crude oil, which rose about 16 percent CLc1 as investors focused on the possible budgetary impact of the U.S. financial rescue plan.

"While this bailout package does remove some of the systemic risk from the U.S. financial system, its also clear that with the potential rise in U.S. debt ratios and the effect on their fiscal balance will hurt the dollar in the medium term," Danske Bank currency strategist Kasper Kirkegaard said.

Asian overnight activity was relatively calm due to a public holiday in Japan, allowing the battered U.S. currency to recover some ground, but risk aversion remained high as financial stocks led European share prices lower [.EU].

By 0841 GMT, the dollar was up half a percent against a basket of currencies at 76.600 .DXY, while the euro fell 0.7 percent to hit session lows at $1.4688 <EUR=>. The dollar also rose 0.3 percent to 105.79 <JPY=>.

It was helped as the surge in oil prices ran out of steam, with crude down $2.55 at 106.91 a barrel. Oil's spike on Monday saw the euro stage its biggest one-day gain since its inception in January 1999 to hit a one-month high of $1.4867.

Investors remained on tenterhooks as the U.S. bailout plan, which would give sweeping powers to the U.S. Treasury to buy mortgage-related bad debts from financial firms, has yet to receive congressional approval.

U.S. politicians have expressed concerns over the current state of the legislation, with approval expected to drag into next week, damping initial market euphoria. [ID:nSP4331]

Moreover, doubts have grown on the effectiveness of the package to resolve a crisis that has seen the collapse of Lehman Brothers (LEHMQ.PK: Quote, Profile, Research, Stock Buzz) and an $85 billion bailout of American International Group (AIG.N: Quote, Profile, Research, Stock Buzz).

EURO ZONE PRESSURED

While the U.S. financial woes have dominated sentiment, poor manufacturing activity data served as a timely reminder that it was not the only source of concern in the global economy.

Euro zone manufacturing activity fell to a near seven-year low of 45.3 from August's 47.6, considerably below the 47.2 forecast [nLAG003061].

"People have been looking at the PMI out of the euro zone and have been flip flopping (over) what has been the worst story -- is it the U.S., is it the euro zone," said Chris Turner, head of FX strategy at ING.

UBS said in a note to clients that uncertainty over the implementation of the U.S. plan "will keep the dollar on the back foot for now."

However, a successful implementation of the plan would ultimately prove positive for the dollar, UBS said.

U.S. Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke start two days of congressional hearings on Tuesday to hasten approval of the bailout.

Traders said concerns about the bailout plan could push the dollar towards a four-month low of 103.54 yen hit last week, when investors rushed for safe haven assets off the back of plunging equities after the failure of Lehman Brothers. (Reporting by Veronica Brown; Editing by Swaha Pattanaik)

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