NEW YORK, Jan 30 (Reuters) - The dollar rose against the euro on Friday, on track for its best month since October, as evidence of a prolonged slump on both sides of the Atlantic added to the greenback's appeal as a safe haven for investors.
The euro shed more than 1 percent against the dollar and tumbled against the yen after euro-zone employment and inflation data underscored the spreading economic malaise.
Another report showed the U.S. economy shrank 3.8 percent in the last three months of 2008, its fastest pace in nearly 27 years. But because that was not as bleak as the 5.4 percent contraction markets had expected, the dollar got a boost.
Though economists expect the U.S. downturn to accelerate in the first half of 2009, currency strategists said that would simply weaken global growth further, adding to the appeal of the dollar and Japanese yen over other major currencies.
"The dollar has been displaying resilience to bad economic numbers," said Vassili Serebriakov, senior currency strategist at Wells Fargo in New York. "There's some question about whether continued accumulation of very weak data will weaken this resilience, but for now, I think it suggests risk-aversion is still driving the currency market."
The euro was changing hands at $1.2804 <EUR=>, down 1.2 percent on the day and 8.4 percent in January, its worst monthly slide since October. It shed 1.4 percent to 114.99 yen <EURJPY=>. The dollar fell 0.2 percent to 89.75 yen <JPY=>.
The Japanese currency benefits as investors sell riskier assets and currencies that were financed with cheaply-borrowed yen, while the dollar rises as money is repatriated into safe-haven U.S. assets such as Treasuries.
Mansoor Mohi-uddin, currency strategist at UBS in Zurich, said U.S. investors have "substantial scope for further repatriation" in coming quarters if risk aversion stays high.
"Of course, U.S. investors can't repatriate assets forever, but for now, the share of their portfolios held in foreign markets remains well above historical levels," he said.
Moody's Investor Service's decision to downgrade its outlook on Ireland's long-term debt also dented the euro. The Standard & Poor's rating agency earlier this month cut the credit ratings of Spain, Portugal and Greece.
Michael Woolfolk, senior currency strategist at The Bank of New York-Mellon, said the euro's slide through technical resistance at $1.28 may set up a move toward $1.25 next week.
Sterling rose 1.3 percent to $1.4480 <GBP=>, lifted by better-than-expected mortgage data, though analysts said it could struggle next week ahead of a Bank of England meeting likely to result in a 50 basis point rate cut to 1 percent.
The dollar rose 0.6 percent to 1.1599 Swiss francs <CHF=> after Swiss President and Finance Minister Hans-Rudolf Merz was quoted by Market News as saying he would back the central bank if it wanted to sell the franc.
Last week, SNB Vice Chairman Philipp Hildebrand said the bank stood ready to engage in unlimited currency intervention to weaken the franc and fend off deflation.
(Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Chizu Nomiyama)
Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests.
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