FOREX-Profit taking boosts dollar, maybe not for long

(Updates prices, adds quotes, changes byline)

By Toni Vorobyova

LONDON, Feb 18 (Reuters) - The dollar recovered in trade thinned by a U.S. market holiday on Monday, as investors locked in profits following the currency's worst weekly performance of the year so far.

A series of bleak U.S. economic reports last Friday, including one showing consumer sentiment hitting a 16-year low, had rekindled worries about a U.S. recession and reinforced expectations for more hefty interest rate cuts.

"Because the U.S. is closed today, European investors are taking the opportunity to take some profit after Friday's (dollar sell-off)," said Carole Laulhere, currency strategist at Societe Generale in Paris.

But in the medium term, she added, the dollar should remain on the defensive after Friday's weak data and expectations for more weak releases this week as well as the likely dovish tone of the Fed minutes on Wednesday.

"The minutes should confirm that the Fed is OK to cut again if necessary and we are sure it will deliver another rate cut at the next (meeting), so we see no big reason to expect a lasting trend reversal in the dollar," she said.

By 1117 GMT, the dollar was up 0.3 percent against a basket of major currencies .DXY at 76.322, after falling 0.74 percent last week in its worst weekly performance since December.

The euro edged down 0.3 percent against the dollar to $1.4631 EUR= but held within reach of a two-week peak of around $1.4710 set on Friday.

The greenback was 0.4 percent firmer at 108.19 yen JPY=.

Against higher-yielding currencies such as the Australian dollar, the dollar was much weaker.

The Aussie climbed half a percent to a three-month high above $0.91 AUD= thanks to its hefty yield advantage and expectations that the Reserve Bank of Australia (RBA) will raise rates from the current 11-year high of 7 percent as early as March.

FED CONTRAST WITH AUSTRALIA'S RBA

That was in sharp contrast to the Fed's deep cuts in benchmark rates since September to 3 percent from 5.25 percent, with investors eyeing another 50 basis point reduction at the March policy meeting FEDWATCH.

JP Morgan reiterated buying Australian dollar versus the U.S. currency as one of its top trades among the majors.

"(Aussie) should remain supported despite fluctuations in the dollar as the RBA remains hawkish and gold prices are supported," the bank said in a research note.

It added that in contrast to the likely dovish tone in Fed minutes, RBA's ones -- also due this week -- "should echo the hawkish sentiment from news in the past week and support AUD".

Elsewhere, sterling fell half a percent against the dollar to $1.9502 GBP= following Sunday's announcement that Britain had decided to nationalise ailing bank Northern Rock NRK.L, adding to worries about the health of the UK economy.