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NEW YORK, Nov 12 (Reuters) - The dollar rose sharply on Monday, reversing some of its recent losses as nervousness about credit-related losses at U.S. banks triggered a wave of risk reduction in light volume.
With bets against the dollar at record levels, major investment banks have announced more than $50 billion in write-downs and losses resulting in part from subprime mortgage loans gone bad. That has raised fears that there may be a lot more in losses to come, driving dealers to reduce the amount of risk they take overseas.
Dealers said that Monday's gains may have been sparked and then exacerbated by increased caution in thin markets with the U.S. Treasury debt market closed for the Veterans Day holiday.
"People were so one sided we're getting some repositioning here but it is not like there is a change in trend," said Win Thin, senior currency strategist at Brown Brothers Harriman. "Maybe some of the move is exaggerated by thin markets."
Prior to Monday, the dollar had been falling steadily on expectations the Federal Reserve would cut its benchmark interest rate to stave off an economic recession potentially brought on by weakness in the housing sector.
However, a sudden pullout from carry trades has been a signal to dealers to book profits now, especially with bets against the dollar so stretched.
Against the dollar, the euro slipped almost 0.9 percent to $1.4544 <EUR=>, retreating from a record high of $1.4752 hit on Friday.
Even more dramatic was the U.S. dollar's surge against the Canadian dollar <CAD=> and Australian dollar <AUD=>, both of which recently rose to their highest levels in more two decades against the U.S. dollar.
The greenback rose to C$0.9627, up 2.1 percent on the day, on track for the largest daily gain since January 1971.
The Australian dollar plummeted around 3 U.S. cents on the day to US$0.8850, down 3 percent.
"Our metaphor has been that the dollar's 'boat' has been populated to the bearish side so heavily that it was 'listing' more than merely awkwardly, and that it was due to capsize," said Dennis Gartman, independent investor, in a daily note to clients.
The value of the net short position in the U.S. dollar among traders in the Chicago Mercantile Exchange's International Monetary Market rose to $32.54 billion in the week to Nov. 6, the highest for at least a year.
THE YEN ALSO RISES
Independent of dollar strength, the yen has been charging higher in the last week. It climbed to a 1-1/2-year high against the dollar on Monday, benefiting as investors unraveled risky trades in which they borrow low-yielding currencies to buy higher-yielding ones.
The dollar fell to an 18-month low of 109.13 yen, according to Reuters data <JPY=>, before recovering slightly to trade at 109.86, down about 0.8 percent on the day.
The dollar last week suffered its biggest weekly decline against the yen since December 2005. Investors who depend on computer models to make investment decisions, both from relatively large institutions and highly leveraged funds, have been sellers of the dollar against the yen, CitiFX Flows analysts said.
The euro was down 1.6 percent at 159.85 yen <EURJPY=>, falling below 160 yen for the first time in two months.
A recent increase in stock market volatility and persistent reports of losses at investment banks have given investors reason to close out of many winning trades ahead of the year end. (Reporting by Nick Olivari and Kevin Plumberg; Editing by Tom Hals)