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By Toni Vorobyova
LONDON, Nov 27 (Reuters) - The dollar took heart on Tuesday from news that Citigroup Inc (C.N: Quote, Profile, Research) will sell a stake to the Abu Dhabi government and it rose against the euro, the yen and the Swiss franc.
Citigroup said it would sell a $7.5 billion stake to the investment arm of the Abu Dhabi government in a deal that would offer a shot of funds to the bank, which has been one of the hardest hit by the global credit crunch triggered in August by defaults on U.S. mortgages.
Investors interpreted Citi's move as a sign that financial institutions were repairing the damage from a meltdown in the U.S. subprime mortgage market and the resulting credit crunch, which has been a big factor behind recent dollar weakness.
"Overnight the Citi bank news saw a good bounce back in carry trades. U.S. stock market futures are up and if that can be maintained we will probably see carry do OK this afternoon," said Geoff Kendrick, currency strategist at Westpac.
The dollar pulled away from a 2-1/2-year low against the yen hit on Monday to trade at 108.05 <JPY=> by 1141 GMT, having earlier climbed as high as 108.80, according to Reuters data.
The yen fell broadly as news of the Citi stake sale prompted a recovery in the Nikkei share average, warming demand for risky carry trades.
The dollar also gained against the low-yielding Swiss franc, rising 0.3 percent to 1.0998 francs <CHF=>.
"The market response really highlights just how frail the banking sector is perceived to be in light of the subprime crisis," economists at UBS said in a note to clients.
EUROPE STRONG - FOR NOW
The euro traded 0.2 percent lower on the day at $1.4852 <EUR=> and about a cent below last week's record highs, after paring some of its earlier losses following a stronger than expected reading of Germany's Ifo survey.
The headline business climate number for November rose to 104.2 from 103.9 the previous month, compared with a consensus forecast of 103.3.
Coupled with news of rising inflation in German states, the Ifo reinforced expectations that the European Central Bank would remain on hold for some time, even as its counterparts elsewhere loosen monetary policy.
German Finance Minister Peer Steinbrueck said on Tuesday he expected the economic upturn in the euro zone's largest economy to continue in 2008 despite the strong euro.
Nonetheless there are signs that the euro's exchange rate is starting to approach levels which could worry policymakers.
ECB Governing Council member Nicholas Garganas told Reuters on Tuesday that recent euro gains versus the dollar have been "sharp and abrupt" and that sharp and abrupt currency moves are not desirable.
"Although we stick to our view that ... a test of the $1.50 level (in euro/dollar) is just a matter of time, the increasing number of such official comments and the acknowledgement that growth in the euro zone could weaken, could at least dampen the euro's surge or cause a correction lower," Commerzbank Corporates & Markets said in a research note.
U.S. data due this week could show persistent weakness in the U.S. economy, re-igniting selling pressure on the dollar.
Tuesday features the S&P/Case Shiller house price index for September at 1400 GMT and U.S. November consumer confidence an hour later.
The dollar has been battered as the market is convinced that financial institutions will continue to suffer from credit problems whose effects could spread to the wider economy.
Adding to existing signs of economic weakness, investors believe this may prompt the Federal Reserve to cut its benchmark interest rate by 25 basis points from 4.5 percent next month, after chopping it by a total of 75 basis points since September.
(Additional reporting by Meg Clothier)