Business

Fri Jun 27 02:33:13 PDT 2008

* Dollar steadier but seen vulnerable to further downside.

* Yen gains as risk aversion rises.

* Euro holds near upper end of recent range against dollar.

* Dollar index flat at 72.505

(Updates prices, changes byline, previous TOKYO)

By Ian Chua

LONDON, June 27

(Reuters)

- The dollar steadied on Friday from a slide in the previous session but held near three-week lows versus the euro after renewed worries about the U.S. economy sent the blue-chip Dow skidding to a 21-month low.

A fresh all-time high for U.S. crude also kept investors worried that rising energy costs will hurt global economic growth. Oil climbed more than $1 to hit a fresh peak of $141.71 per barrel on Friday.

But buying from Japanese importers, mutual funds and margin traders earlier helped stabilise the dollar and gave a boost to higher-yielders such as the New Zealand currency.

Still, analysts remained cautious about the outlook for the U.S. dollar given the dour prognosis for the world’s biggest economy.

"We’re going to continue to see the dollar come under pressure. We’re seeing signs of increased risk aversion and as we head into the quarter end, we’re seeing increasing strains in the various funding markets," said David Pais, currency strategist at Citigroup.

At 0753 GMT, the dollar was flat against a basket of major currencies at 72.505, steadying after having fallen to a a three-week low on Thursday.

The euro was a touch softer at $1.5741, but held near the top-end of this month’s range roughly between $1.5850 and $1.5300.

The single currency eased 0.5 percent versus the Japanese unit to 167.42 yen while the dollar slipped 0.3 percent to 106.40 yen.

"We expect the yen to move higher. The Nikkei has taken a bit of a battering and historically, the correlation with a weakening Nikkei and a stronger yen has been quite strong over the last few years or so," Citigroup’s Pais added.

The Nikkei stock average fell 2 percent to a two-month closing low on Friday in its longest losing streak in seven months with exporters hammered by uncertainty over the U.S. economy.

A slew of Japanese data showing core consumer inflation hitting a decade-high in May, household spending falling but industrial output rebounding did little to alter the view that the Japanese economy was struggling and the Bank of Japan was likely to keep rates steady at 0.5 percent for a while.

There was little reaction to French producer prices data, which rose 1.3 percent in May from the previous month, more than double the market consensus.

Commerzbank analysts said they anticipated euro/dollar to remain under some steady upward pressure into next Thursday’s European Central Bank meeting, where a quarter point rate hike has been widely flagged.

But "the $1.5860-70 level may well cap the upside for a couple of days given the likelihood today’s key euro zone ESI release should disappoint and remind that at its current levels and those seen in PMI indexes, the ECB has in the past cut rates," they said, referring to the economic sentiment index report due at 0900 GMT.

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