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The dollar rallied against the euro but slipped against the yen in the final trading day of 2007 Monday, though dealers resisted making big bets until volume increases after New Year's Day.
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The Fed already has cut its benchmark federal funds rate by a full percentage point in three moves, beginning at its September meeting, in an effort to ease a credit crunch which began in August.
It was the second straight year of declines for the dollar index.
"It's a funny market right now, and I can't point to any fundamental factor for what we are seeing," said Stephen Malyon, currency strategist at Scotia Capital in Toronto. "We are in holiday trading mode until Wednesday."
The New York Board of Trade's U.S. dollar index, a gauge of the dollar's performance against a basket of six major currencies, rose 0.7 percent on the day to 76.642.
It is down around 8.5 percent for all of 2007 -- on track for its biggest annual fall since it dropped 14.7 percent in 2003 -- though the index is off record lows touched in November.
The euro [$$EURUSD
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] traded 0.8 percent lower from late Friday to $1.4595, after falling as low as 1.4570, according to Reuters data. In November, the euro rose to an all-time high of $1.4968, according to EBS, an electronic trading platform.
Against the yen, the dollar [$$USDJPY
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] fell 1 percent against the yen, to 111.46 yen.
Against the yen, the euro [EUR-TN
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] slid 1.8 percent to 162.70 yen.
In November, the dollar dropped to record lows against the euro and 26-year lows against the British pound [$$GBPUSD
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] largely because a severe tightening of credit markets dragged on economic growth.
Since then however, the dollar has recovered a little, helped by short-term investors taking profits on their bets against the greenback ahead of the year end.
But the small dollar rally that began in November ended in last week's thin trade, particularly after a report Friday showed weaker-than-expected U.S. new home sales data. Futures markets reflect a 90 percent chance of a quarter-percentage-point Federal Reserve rate cut to 4.0 percent in January.
Persistently difficult lending conditions and more signs of slowing in the U.S. economy kept investors away from carry trades, in which they borrow at low rates in currencies such as the yen and Swiss franc to buy riskier, higher-yielding assets.
Sterling [$$GBPJPY
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] has fallen against the yen this year, down 5.1 percent, which while not dramatic is still the biggest decline since 1999.
Versus the Swiss franc, the dollar [$$USDCHF
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] climbed 0.6 percent to 1.1337 Swiss francs.
The Canadian dollar [$$CADUSD
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] was set to be the biggest gainer on the U.S. dollar this year among the 10 most heavily traded major currencies. The U.S. dollar has fallen 14.7 percent this year to C$0.9934.
"In 2008 there will be more wild swings and short-term strength, but we do think that the Canadian dollar will remain under par for the better part of the year," said Tyson Wright, foreign exchange analyst with Custom House in Victoria, British Columbia.
Thin liquidity exaggerated market moves Monday, with Japan and several European countries shut and all major financial centers closed for the New Year's Day holiday on Tuesday.
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