FOREX-Dollar holds firm as investor nerves continue

(Changes byline, updates prices, adds quotes)

By Simon Falush

LONDON, Dec 19 (Reuters) - The dollar held firm near a seven-week high against the euro on Wednesday as traders covered short positions in the U.S. currency before they close their books at the end of the year.

The dollar continued to draw support from unexpectedly strong U.S. retail sales and inflation data last week. This scaled back expectations for aggressive monetary easing by the Federal Reserve next year.

The euro, by contrast, was hit by the Ifo German business index which came in below expectations, while the pound fell after it emerged that the Bank of England's MPC voted 9-0 for a rate cut at the December meeting.

Latest positioning data from the Commodity Futures Trading Commission showed $27.2 billion worth of net short bets against the dollar -- suggesting there is plenty of room for unwinding as 2007 draws to a close.

"The theme is that risk is trading poorly," said John Noyce, senior technical analyst at Citi.

"The dollar is benefiting as it is acting as a funding currency as people are taking short positions off in more volatile markets ahead of year-end."

By 1113 GMT, the dollar was up 0.1 percent against a basket of major currencies at 77.460 .DXY, edging back up towards Monday's two-month high of 77.804.

The euro EUR= edged lower to $1.4399, down 0.1 percent on the day and in sight of a seven-week low of around $1.4330 hit earlier this week.

The euro fell 0.36 percent to 162.75 yen EURJPY=, while the dollar was 0.35 percent down at 112.95 yen JPY=, with the Japanese currency bolstered by weaker equity markets .FTEU3.

UNANIMOUS BOE

Sterling fell to its lowest in three months GBP= after minutes from the Bank of England's December policy meeting showed that all nine members of the MPC voted for rates to be cut to 5.5 percent while forecasters had expected three to dissent.

"There was no suggestion that hawks had acquiesced to the move to reduce the need for deeper cuts in the future, so the unanimous move was rightly interpreted by the market as a dovish signal," said Calyon in a note to clients.

Following the Fed's first term auction on Monday under a co-ordinated plan among central banks to boost liquidity, the European Central Bank's extension of $500 billion in two-week loans to euro zone banks on Tuesday helped to ease anxiety about a year-end credit squeeze.

Along with the results of the Fed's term auction, investors were awaiting the outcome of this week's liquidity injection plans by other top central banks.

Investors will also look to results from Morgan Stanley due out on Wednesday for further clues on the extent to which the credit crunch is affecting financial institutions.

If the bank reports large writedowns as a result of subprime investments, this could further ramp up risk aversion, supporting low yielding currencies like the yen, analysts said.