FOREX-Dollar strength sapped by profit taking in light volumes

Wed Aug 6, 2014 4:52pm EDT

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* Euro bounces up from 9-month low vs dollar

* Dollar index hits 11-month peak, then retreats

* Sterling hit by weak industrial data

* NATO: concerned about threat of Russia entering Ukraine

By Daniel Bases

NEW YORK, Aug 6 (Reuters) - The U.S. dollar slipped on Wednesday, recoiling from a nine-month high against the euro in thin volumes that traders and analysts said exaggerated a round of profit taking.

In the last six weeks, the dollar has been on a tear, racking up gains on the back of geopolitical tensions surrounding Russian troops on Ukraine's border.

Those gains gave way as the euro popped higher around midday in New York trade. The dollar fell under its 200-day moving average against the Japanese yen, which had been a support level in the last week.

"People keep coming back to the geopolitical tensions and the Russians on Ukraine's border. The dollar has run nicely the last few months and this could just be profit taking," said John Doyle, director of markets at Tempus Consulting in Washington.

In afternoon trade, the euro bought $1.3379, up slightly on the day, having touched a low of $1.3333, its weakest since November. The euro traded at 136.55 yen, down 0.55 percent.

"There was no particular headline when this selling occurred. We have illiquid, quiet summer markets," said Mark McCormick, currency strategist at Credit Agricole in New York.

The dollar retreated from an 11-month high of 81.716 against a basket of major currencies, to trade around 81.427, a gain of just 0.12 percent.

Around 20,000 Russian troops massed on Ukraine's eastern frontier were creating a "dangerous situation", NATO said on Wednesday. It warned that Moscow could use humanitarian concerns as a pretext to send troops across the border.

In early trade, the dollar got a boost from a bigger-than-expected narrowing of the June U.S. trade deficit, as petroleum imports fell to a 3-1/2 year low.

The euro was earlier under pressure after Italy said it had fallen into recession again in the second quarter and German industrial performance declined in June at its steepest rate in almost three years.

The European Central Bank next meets on Thursday.

Euro weakness has also been tied into a reversal of equity fund flows. According to Lipper, a Thomson Reuters service, U.S.-domiciled equity funds investing in Europe have had seven straight weeks of net outflows.

"Since June of last year we have seen U.S. money investing into the euro zone and as markets start to take profit and are heavily skewed in terms of positioning the outcome is pressure on European assets and downward pressure on the euro against the dollar," said Sebastian Galy, senior currency strategist at Societe Generale.

Sterling slipped after the UK reported June industrial and manufacturing output grew less than expected, cooling expectations the Bank of England will raise interest rates this year.

The pound hit a session low of $1.6819 before recovering to $1.6847, down 0.22 percent.

A two-day meeting of the BoE's rate-setting Monetary Policy Committee begins on Wednesday, but investors won't know until later in August to see if any members advocated raising rates. (Additional reporting by Jemima Kelly in London, Masayuki Kitano in Singapore and Ian Chua in Sydney; Editing by Larry King, Meredith Mazzilli and David Gregorio)

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