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Dollar Gains Against Euro, Stabilizes Against 12-Year Lows

The dollar edged higher against the euro Monday, recovering from a record low, as dealers awaited economic data later in the week to see if U.S. credit market turmoil has spread to other sectors.

Short-term investors closed their bets against the greenback after the euro failed to sustain gains beyond record highs near $1.3850, allowing the dollar to stabilize near 12-year lows against a basket of major currencies.

"We've had an enormous rally in currencies against the dollar and at some point in time people want to take some money off the table," said John McCarthy, director of foreign exchange trading at ING Capital Markets in New York.

"But bearish sentiment on the dollar is still the strongest I've seen in some time, and any good dips in the euro are probably going to be seen as opportunities to buy again."

By mid afternoon the euro was trading at $1.3800 , down 0.2 percent on the day, after hitting an all-time high earlier in the session of $1.3846, according to electronic platform EBS.

Sterling rose to a 26-year high versus the dollar above $2.06, before paring those gains to trade only slightly up on the day at $2.0575.

Many analysts and dealers have said they expect more dollar selling in the days ahead before a sustained rebound.

The U.S. currency is coming off five consecutive weeks of declines, mostly on fears of widespread fallout from the U.S. subprime mortgage crisis.

The dollar index, a gauge of the dollar's value against six major currencies, was up 0.1 percent at 80.364 after dropping to a 12-year low of 80.117 on Friday. Against the Swiss franc , the dollar climbed 0.5 percent to 1.2070 francs.

"Reflecting the growth and interest rate divergence between the U.S. and the rest of the world, the dollar will likely continue to be treated as the 'subprime currency,"' said Stephen Jen, global head of currency research with Morgan Stanley in London.

There are no major economic data releases from the United States, UK or the euro zone on Monday, leaving FX investors to focus on equity, credit and bond markets for direction.

Jitters about U.S. housing and credit sentiment are likely to remain dominant.

June U.S. existing home sales are due on Wednesday and new home sales data are due on Thursday. The market will also get its first look at second-quarter U.S. gross domestic product growth on Friday.

The New Zealand dollar surged above $0.80 for the first time since the currency was floated in 1985, strengthening to a high of $0.8058 and gaining almost one percent on the day. The Reserve Bank of New Zealand is expected later this week to continue raising rates, which are already among the highest in industrialized countries.

The dollar was relatively steady against the yen at 121.30 yen, having hit a six-week low around 120.80 yen earlier in the day.

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