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Dollar Boosted by Citi Results, But Fears Linger

The dollar rose against a basket of six major currencies on Friday, boosted by news Citigroup posted a smaller-than-expected loss in the second quarter, further calming fears about the health of the U.S. financial sector.

The results from Citi , the largest U.S. bank, add to positive earnings news from other banks such as Wells Fargo and JP Morgan Chase earlier this week.

As well as injecting fresh impetus into the dollar, Citi's results increased optimism in the stock market.

"Citi earnings have encouraged the market to take on more risk and given (the dollar) a lift," said Stephen Malyon, senior currency strategist at Scotia Capital in Toronto.

They were "consistent with other bank earnings seen earlier this week which has turned sentiment around on the dollar a little bit."

The dollar also benefited from sharp falls in sterling after the Financial Times reported the UK Treasury is working on plans to change its fiscal rules.

This could effectively give it more leeway to increase borrowing as a way of mitigating the effects of an anticipated economic slowdown.

Early in New York, the dollar index, which tracks its performance against a basket of six major currencies, was up 0.3 percent at 72.250 , though still close to the record low of 70.698 hit in March after the Federal Reserve coordinated JP Morgan Chase's takeover of Bear Stearns.

Sterling was down 0.3 percent at $1.9950 , even though the UK Treasury dismissed the FT report as "pure speculation." The euro fell, and the dollar was up against the yen .

The euro was capped by European Central Bank President Jean-Claude Trichet's comments published on Friday that euro zone growth is likely to be weak in the second and third quarter before staging a recovery. Risks to growth were on the downside, Trichet said in a joint interview with four European newspapers.

For the week, the euro has lost 0.8 percent against the dollar, while the dollar rose 0.7 percent against the yen.

Sentiment Still Haunted

Despite the boost, dollar sentiment was still looking quite shaky, given concern over the U.S. financial system and bleak growth prospects due to the slumping housing market.

U.S. mortgage giant Freddie Mac said in an SEC filing it expects to purchase mortgages with significantly higher unpaid principal balances and that realized credit losses will continue to increase.

The Wall Street Journal reported Friday that Freddie is considering raising capital by selling as much as $10 billion in new shares.

That plan would preclude the need for a government investment, FTN Financial told clients in a research note.

"The situation for the dollar near-term is still quite negative. The macro-economic implications of the financial market turmoil to date have not really been borne out of the U.S. data, because of the huge fiscal stimulus plan that has kept the economy from sinking," said Derek Halpenny, senior currency economist at BTM-UFJ in London.

"That's going to fade now and over the next couple of months we will see that come through in the data. That will keep the market in a fragile state, and that suggests there is still more potential for the dollar to slide again," he added.

Another focus for currency traders remains the price of crude , which until this week had maintained a close inverse correlation with the dollar.

Oil slid more than $10 in the last three days and fell to a six-week low but recovered on Friday.

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