Dollar advances; traders trim risk exposure

NEW YORK (Reuters) - The dollar rose for a second straight session on Friday as risk tolerance fell and investors cut exposure to assets and currencies perceived as higher risk ahead of a holiday-shortened week in the United States.

European and U.S. shares declined alongside oil, gold and high-yield currencies such as the Australian dollar.

The dollar is down some 14 percent since mid-March as signs of global recovery prompted investors to favor higher-yield currencies and assets. Expectations for U.S. interest rates to remain at record low levels into 2010 also hurt the greenback.

"It's been a very good year for a lot of people, and it makes sense that players are going to square up positions today ahead of the U.S. holiday and month end," said Michael Woolfolk, strategist at BNY Mellon in New York.

U.S. markets will be shut next Thursday for Thanksgiving with many traders and investors also taking Friday off as vacation, while Monday marks a national holiday in Japan.

The dollar was off highs for the day but still firmer against most major currencies.

The euro fell 0.4 percent to $1.4859 after touching a two-week low of $1.4800.

Against the yen, the dollar slipped 0.1 percent to 88.98 yen while the euro fell below and then hovered around its 200-day moving average near 132.10 yen.

Reaction was muted as the Bank of Japan kept interest rates at a record low 0.1 percent, as expected, and upgraded its assessment on the economy.

Sterling shed 0.9 percent to $1.6502 and the Australian dollar lost 0.4 percent to $0.9153, after earlier touching a two-week low. It was headed for a 2.1 percent decline this week at current prices.

ANXIOUS INVESTORS

Some analysts said investors wanted to see more evidence that the world economy is back on track before blindly buying risky assets in the hope of higher returns.

European Central Bank President Jean-Claude Trichet said on Friday it was too early to say the financial crisis was over, and warned banks risked becoming addicted to cheap money from emergency government stimulus programs and must be prepared for its withdrawal.

Andrew Wilkinson, senior analyst with Interactive Brokers in Greenwich, Connecticut, said some investors "are starting to get cold feet over the health of asset market rallies, taking the line that stocks have come too far too soon and that they should -- if only for safety's sake -- perhaps hold onto their dollars after all." The dollar index, a non-traded calculation which measures the dollar's performance against a basket of six other major currencies, was up 0.4 percent on the day at 75.606 .DXY, well above a 15-month low of 74.679 touched on Monday.

Traders said gains in the futures contract of the dollar index were based on a faulty trade and the ICE Futures Exchange said it had canceled trades above 76.50.

Some 17,847 December futures contracts changed hands on Friday compared with average daily volume year to date of 8,303. The futures contract was up 0.4 percent at 75.695. Open interest was reported at 38,272.

The greenback was also supported as banks parked funds in safe-haven assets such as U.S. government bonds to "window-dress" their books ahead of closings at the end of this month and next.

Rates on short-dated U.S. government paper fell on Friday, with the two-year Treasury note yield at one point falling to the year's low beneath 0.68 percent.

(Additional reporting by Steven C. Johnson in New York and Naomi Tajitsu in London; Editing by James Dalgleish)