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By Veronica Brown
LONDON, July 26 (Reuters) - The dollar steadied on Thursday, clinging to gains made the previous day during a sharp technical rebound from 15-year troughs against a basket of major currencies that allowed investors to trim some exposure to risk.
The greenback had tumbled across the board in recent weeks on investor concern that troubles in the U.S. subprime mortgage market -- catering to borrowers with a poor credit history -- could spill over into slower economic growth and lead to interest rate cuts.
But with the dollar setting historic lows, including record troughs versus the euro and 26-year lows versus sterling, positioning became overstretched. A fall in the dollar index towards 80 on Tuesday proved the catalyst for a correction.
"There was a fairly high degree of a technical rebound as once (the euro) went above the $1.38 area, it did look like a fairly aggressive move over a short space of time. There's also a little bit of a realisation that perhaps the subprime issue is not necessarily a U.S. centric problem," Rabobank strategist Jeremy Stretch said.
Gains in U.S. stocks on Wednesday quelled some worries that fallout from rising mortgage defaults and a wave of credit downgrades might drag on the rest of the economy.
"People are obviously still nervous about the subprime issue in the U.S. ... For now the dollar will still be on the back foot but it's not going to be the same one-way traffic as we had seen over the last few weeks," said Daragh Maher, senior currency strategist at Calyon.
The euro was steady at $1.3722 <EUR=> by 0950 GMT. It fell more than 3/4 of a percent on Wednesday, posting its biggest daily fall in percentage terms since January and retreating sharply from Tuesday's record high at $1.3852, according to Reuters data.
The single currency shrugged off a slight fall in the German Ifo business climate index in July which did little to change expectations for a further euro zone rate hike in coming months.
The dollar was flat at 120.47 yen <JPY=>, in sight of 2-1/2 month lows around 119.80 yen touched in the previous session.
The euro flat at 165.34 yen <EURJPY=>, holding near Wednesday's one-month lows.
Against a basket of currencies (.DXY: Quote, Profile, Research), the dollar was at 80.60, recovering from a 15-year low of 80.01 touched on Tuesday and keeping above the psychologically crucial 80.00 level.
SPOTLIGHT ON SUBPRIME
With the spotlight on subprime mortgages, investors are paying particular attention to news on the U.S. housing market.
Figures on Wednesday showed that the pace of U.S. existing home sales in June fell to a 4-1/2-year low. New home sales due at 1400 GMT are expected to slide from the previous month.
"If we get further evidence of capitulation of non-subprime mortgage market in the U.S. that would potentially see another leg of dollar weakness," Rabobank's Stretch said.
In a sign that subprime woes could spread beyond the United States, Absolute Capital became the second Australian hedge fund to get caught up in the subprime fall out and suspend withdrawals from two of its funds [ID:nSYD212150].
Nonetheless, the Australian dollar shrugged off the news, staying near 18-year peaks versus the U.S. currency <AUD=>.
The New Zealand dollar dropped around 0.3 percent to US$0.7980 <NZD=> after the Reserve Bank of New Zealand hiked rates to 8.25 percent as expected but said it did not expect to move again any time soon.
New Zealand's interest rates are the highest in the industrialised world, which has made it a popular destination for carry trade investments funded by borrowing in low-yielders like the yen.