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Dollar Gains as Investors Trim Bets Against It

The dollar hit a five-week high as investors pared back aggressive bets against the currency after limited reaction to China's move on the yuan and rates last week shifted focus to U.S. economic fundamentals.

The yen hit a record low against the euro and a three-month trough versus the dollar as calm investor response to China's move boosted risk appetite and fanned flows into higher-yielding
currencies.

The Canadian dollar hit its highest level in almost 30 years against the U.S. currency after recent robust data boosted expectations of higher rates.

Recent U.S. data showed improving consumer morale and a rebound in manufacturing activity, which pared expectations for a yield-harming interest rate cut. This helped investors cut back their overstretched positions against the dollar.

"We've seen speculative positioning carry on building in euro/dollar. Now these positions are being pared back. We are not seeing an environment where the dollar is damaged. U.S. data has been positive," said Adrian Hughes, currency strategist at Societe Generale.

"We are still seeing stickiness in inflation numbers which is not encouraging for rate cuts. (For Japan,) it's business as usual -- higher Nikkei and weaker yen."

The euro was down , off the April record high above $1.3680. The dollar had risen to 121.63 yen and 1.2332 Swiss francs.

The dollar hit a five-week high against a basket of currencies.

The euro earlier hit lifetime peaks of 1.6614 Swiss francs and 163.94 yen. The Canadian dollar was .

Net short dollar positions held by international speculators jumped in the latest week, while net long euro positions hit a record high on a contract basis.

Investor Appetite

After the weekend meeting in Germany, Group of Eight finance ministers issued a communique that was upbeat on global growth and made no mention of currencies. The ministers said currencies were not discussed.

"The resilience of markets may reflect broader strength in risk appetite, and the macroeconomic backdrop which fostered this elevated risk appetite hasn't really changed," said Todd Elmer, currency strategist at Citigroup.

Investors are eyeing a meeting between U.S. Treasury Secretary Henry Paulson and China Vice-Premier Wu Yi on May 22-23 in Washington where discussion on trade relations, including the value of the yuan, is expected.

Elsewhere, investors are eyeing the impact on prospects for a Gulf monetary union of Kuwait's decision to drop its exchange rate peg to the dollar and hook up to a basket of currencies.

The Gulf countries have been accumulating hefty FX reserves thanks to high oil prices and diversifying away from dollars.

"Greater FX flexibility and slower reserve accumulation across the emerging world will eventually reduce the huge distortion in the dollar's value caused by central bank reserve diversification," HBOS said in a note to clients.

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