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Sep 13, 2007

LONDON, Sept 13 - The dollar strengthened against the yen on Thursday, as investors took a breather from selling the U.S. currency and waited to see how deeply the Federal Reserve might cut interest rates next week.

The Fed is widely seen lowering rates by 25 or 50 basis points from 5.25 percent at next Tuesday's meeting to help stem an economic slowdown arising from problems in the U.S. housing market and subprime mortgage sector.

The dollar has slid below the closely-watched 80 level on the trade-weighted index against six major currencies as investors have shunned the U.S. currency, driving the euro to an all-time peak above $1.39 and the Canadian dollar near a 30-year high.

"The dollar has slightly come back up. But I would hesitate to call it a recovery," said Nick Parsons, chief currency strategist at National Australia Bank in London.

"For four days now, the dollar has consistently traded below below 80 in the dollar index ... and this has encouraged people to trade the dollar on the short side. So today's slight uptick in the dollar is just part of normal price action," he added.

By 0746 GMT, the dollar was up 0.3 percent against the yen at 114.44 yen , recovering from a 14-month low of 111.60 yen struck last month.

The dollar index edged up slightly to 79.475 (.DXY: Quote, Profile, Research) after having slid to 79.319 on Wednesday, near its all-time low of 78.19 hit in 1992. The 80.00 zone has historically provided chart support for the index.

The euro was flat from late U.S. trade at $1.3903 after climbing as far as $1.3915 the previous day, according to trading platform EBS -- the highest since its launch at the start of 1999.

The euro has risen broadly this week, as recent comments from European Central Bank officials have seemed to leave open the possibility of future euro-zone rate hikes, even as the Fed is expected to start lowering interest rates.

Analysts said there is unlikely to be any immediate respite for the dollar, even if the market becomes heavily underweight on the currency.

"Should upcoming data, in particular (U.S.) retail sales data come in ahead of expectations we could see a short-term squeeze, but for now at least it seems the market is likely intent on testing towards the next big psychological level, namely $1.40," in the euro, said Rabobank in a research note.

With some markets, such as stocks, showing signs of returning to normalcy from the upheaval of the past few months, the focus has shifted back to the U.S. economy's housing-led deterioration.

"The real problem is the U.S. economy," said Luke Waddington, head of forex trading at Royal Bank of Scotland in Tokyo. "Overall there's some excitement in the price in terms of dollar weakness."

In Japan, meanwhile, Prime Minister Shinzo Abe's shock announcement on Wednesday that he will step down had little sustained impact on the yen as the country's ruling party scrambled to find a new leader and avoid a policy vacuum. [nT115429]

And the high-yielding Australian and New Zealand dollars both slipped on Thursday, partly after data showed retail sales in New Zealand were flat in July from a month earlier compared with forecasts for a 0.2 percent gain.

The report followed the Reserve Bank of New Zealand's decision to keep rates on hold at 8.25 percent, the highest among developed economies, with the central bank acknowledging signs of slowing demand but saying inflation remained a worry. [nWEL211551].

The New Zealand dollar was flat at US$0.7122 , while the Australian dollar lost about 0.1 percent to US$0.8416.



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