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By David McMahon
NEW YORK, July 25 (Reuters) - The dollar rose sharply on Wednesday, posting its biggest daily gain in a year against a basket of major currencies in a technical rebound after hitting fresh record lows against the euro.
Investors shrugged off an unexpectedly soft report on U.S. existing home sales, and instead bought back the greenback after its sharp fall this week driven by growing worries about weakness in the U.S. subprime mortgage market.
"In the longer term, we are still very much dollar bears, but the weakening trend was looking very much extended and we are seeing a move back against that trend," says David Durrant, chief strategist at Julius Baer Investment Management.
The yen also rose across the board, as trouble in the credit markets led some investors to sell higher yielding currencies and buy yen to unwind bets made by borrowing cheap in the Japanese currency.
"What we're seeing is a little bit of risk aversion and volatility returning to the market," said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey. "Volatility is the natural enemy of the carry trade, so we're seeing a good pullback in the yen crosses."
The euro fell as low as $1.3696 on electronic trading system EBS before settling around $1.3715, down 0.8 percent on the day and well below record highs above $1.3850 hit on Tuesday.
Sterling dropped 0.5 percent to $2.0525 <GBP=>, more than one cent below a 26-year peak hit on Tuesday.
The dollar was up 1 percent against the Swiss franc at 1.2135 francs <CHF=>.
Against the yen, the dollar's gains were more modest, rising 0.4 percent to 120.45 yen <JPY=>.
The dollar index (.DXY: Quote, Profile, Research), a broad measure of the greenback against six major currencies, has declined for five consecutive weeks and on Tuesday, hit a 15-year low before bouncing off key support at 80.00.
It was up 0.7 percent at 80.609 on Wednesday.
"The dollar is in for a correction, but we need a break of 80.70/75 to confirm it," said Divyang Shah, currency strategist with Commonwealth Bank in London.
The dollar's gains on Wednesday came despite a private-sector report that showed U.S. existing homes sales in June were the lowest since November 2002, although the median price rose for the first time in 11 months.
Furthermore, in the latest sign of deterioration in demand for non-government fixed-income products, Chrysler postponed a $12 billion syndicated auto loan deal, dealing a brief jolt to U.S. equity prices.
Looking ahead, the market's main focus on Thursday will be new home sales for the month of June. The first reading of U.S. gross domestic product for the second quarter will follow on Friday. (Additional reporting by Kevin Plumberg)