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FOREX-Dollar extends gains as growth woes hit risk currencies
* Dollar index rises to 9-day high
* USD/JPY at 5-wk high, traders cite Japan's fiscal woes
* Euro, commodity currencies steady after big declines
* Growth worries, banks' ratings downgrade sap risk appetite
* Merkel, Hollande, Monti, Rajoy meet at 1200 GMT
By Anirban Nag
LONDON, June 22 (Reuters) - The dollar rose to its highest in more than a week against a basket of major currencies on Friday, supported by safe-haven flows with investors' confidence in riskier assets knocked by a Moody's downgrade of the world's major banks and growth worries.
The euro slipped to its lowest in nine days against the dollar as wariness set in ahead of an European leaders meeting later in the day and a German business confidence survey that is likely to disappoint.
Friday's meeting between German, French, Italian and Spanish leaders will search for ways to achieve fiscal and banking union in the euro zone and, more urgently, it may also be the occasion for Spain to formally request assistance of up to 100 billion euros for its struggling banks.
The euro fell to a session low of $1.2519, pulling away from this week's peak of $1.2748 set on Monday. Traders cited selling by macro funds with stop-loss orders cited below $1.2510. It was last trading at $1.2535 and traders said a decisive break of $1.2520 could open the way for a test of $1.2288, the near two-year low struck on June 1.
The dollar index rose to 82.465, its highest level since June 13 and having rallied nearly 1 percent in the previous session.
Overnight, the dollar staged its biggest rally in more than three months after key surveys of business activity from China to the euro zone and the United States darkened the outlook for the world economy.
"The data everywhere is quite bleak," said Steve Barrow, currency strategist at Standard Bank.
"While the focus is still on the euro zone, we have the UK in a recession, the euro zone nearly there, all of which could spillover and drag the U.S. and China lower. In that kind of a scenario, investors will head into the U.S. dollar."
Traders favoured the safety of the greenback, having sold it before the Federal Reserve meeting earlier in the week as they hedged against a small possibility that the bank would take aggressive quantitative easing steps.
Instead, it announced the continuation of its "Operation Twist" which sells short-term bonds and buys longer-term securities, prompting traders to buy back the dollar.
The U.S. dollar and the Japanese yen are usually the most sought-after currencies during financial market stress and economic uncertainty.
SHIFT AWAY FROM RISK
Investors have been shifting away from riskier assets after China's factory sector shrank for an eighth straight month, business activity in the euro area contracted for a fifth month and U.S. manufacturing grew at its slowest pace in 11 months.
Added to that, Moody's on Thursday cut the credit ratings of 15 global banks including JPMorgan and Morgan Stanley .
Commodity currencies were hit hard as well, with the Australian dollar suffering its biggest one-day percentage fall in six months. The growth-linked Aussie bought $1.0054, having dropped more than 1.3 percent from Thursday's high of $1.0205.
The dollar was flat against the yen at 80.28 yen, having hit a five-week high of 80.525. The yen normally tends to gain in times of heightened uncertainty, but this time investors are fretting over Japan's economic problems.
Bickering in the ruling Democratic Party of Japan, which may lead to a snap election, will further undermine unpopular Japanese Prime Minister Yoshihiko Noda's ability to tackle the country's massive debt, twice the size of its $5 trillion economy.
"Short-term accounts and hedge funds sold off the yen as Japan's fiscal woes once again came into light, with the ruling party split over a vote on a sales tax hike," said a Tokyo based trader.
Market participants speculated that if the tax bill is passed, there would be even more pressure on the central bank to loosen its policy further.
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