Dollar falls as stock rally lifts risk appetite

People line up to sell U.S. dollars and Japanese yen at money changer in Manila November 21, 2008.

NEW YORK (Reuters) - The U.S. dollar fell against a basket of currencies on Thursday as a firmer tone in world equity and commodity markets eroded demand for the greenback as a safe haven.

U.S. stocks .DJI jumped following a string of stronger-than-expected quarterly corporate profits, while European shares .FTEU3 rose in a rally led by financial stocks and crude oil prices advanced above $65 a barrel.

That helped the euro and currencies perceived as higher-risk recoup some of the previous day's sharp losses while weighing on the dollar and yen.

"It's generally the risk appetite scenario once again," said Ronald Simpson, managing director of global currency analysis at Action Economics in Tampa, Florida.

Moves in major currencies were limited, however, with many investors staying on the sidelines ahead of key data on U.S. gross domestic product for the second quarter on Friday.

"Traders are holding back a little bit until we see the U.S. GDP number tomorrow. That's going to be quite important for overall sentiment," Simpson said.

In mid-morning trading in New York, the ICE Futures U.S. dollar index, a gauge of the greenback's performance against six major currencies, fell 0.3 percent to 79.377 .DXY. It hit a 2009 low of 78.315 on Tuesday, before staging a strong rebound on Wednesday.

The euro was little changed at $1.4042, paring gains after the International Monetary Fund said in a report on Thursday that the euro's exchange rate looks "somewhat on the strong side relative to its fundamentals."

Based on exchange rate developments from February 25 to March 25, the report said, "estimates place the euro's overvaluation in a range of 0-15 percent.

"The IMF comments are a little bit of a negative for the euro, both the euro's being overvalued and that the ECB should not view current interest rate level as a floor," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.

POUND, COMMODITY CURRENCIES RALLY

The dollar rose 0.5 percent to 95.54 yen, extending gains after government data showing a drop in continuing claims boosted optimism about the U.S. labor market.

The number of U.S. workers filing new claims for jobless benefits rose slightly more than expected last week, but a gauge of underlying labor trends fell for a fifth straight week, the Labor Department said on Thursday.

"The continuing claims component was getting better so that bodes well for the U.S. economy going forward," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto. "That has provided support for the dollar against the yen."

Perceived higher risk and commodity-linked currencies such as the Australian and Canadian dollars rallied, with sentiment buoyed by gains in Chinese shares and a recovery in oil prices.

The Australian dollar gained 1.1 percent to $0.8255 after steep falls on Wednesday. The U.S. dollar fell 0.8 percent against the Canadian dollar to C$1.0820.

Elsewhere, a survey by Nationwide showing UK house prices rose 1.3 percent this month boosted sterling, which rose 0.7 percent against the dollar to $1.6496 and hit a more than four-week high against the euro.

(Additional reporting by Gertrude Chavez-Dreyfuss and Steven C. Johnson; Editing by Chizu Nomiyama)