FOREX-Dollar firms on view credit crisis nearing end

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The dollar climbed to a seven-week peak against the yen and moved further away from a record low versus the euro on Friday after Citigroup's results sparked hope that the worst of the credit crisis has passed.

Troubles at U.S. financial firms have been triggered by weakness in the housing market, but Citigroup's earnings have tempered worries about the sector and boosted risk appetite, enhancing the dollar's appeal.

Citigroup Inc (C.N), the largest U.S. bank, posted a quarterly loss of $5.1 billion and pretax write-downs of $6.0 billion. For more see [nWNAS8367]. But shares in the company rose as investors were appeased by efforts being made to get past its credit problems and drive down costs.

"There's a prevailing sentiment that we're getting past the worst and it's a sentiment that is growing and driving some improvement in the dollar," said Nick Bennenbroek, head of FX strategy at Wells Fargo in New York.

In late afternoon trading, the dollar rose 1.1 percent to against the yen to 103.67 yen JPY=, after reaching its strongest since late February at 104.64 yen. At current prices, the dollar's gains versus the yen were the most in nearly three weeks.

Against the Swiss franc, the dollar rose to a five-week high at 1.0283 francs CHF= and last traded at 1.0172, up more than 1 percent from late on Thursday, posting its largest daily increase versus the franc since April 1.

The dollar index was trading at 72.002 .DXY, up 0.6 percent on the day.

But despite the dollar's gains, analysts cautioned that although U.S. bank earnings this quarter have not been as dreary as some had expected, there are still indications the credit crisis is far from over.

STRESS IN SHORT-TERM MONEY MARKETS

"I would still be cautious because short-term money markets are still under strain. On the U.S. economic front, I still expect bad numbers to come in and I think the news will get worse before they get better," Bennenbroek said.

The euro EUR= fell as much as 2 cents against the dollar from its daily peak. It last traded down 0.5 percent on the day at $1.5810 in late afternoon trading, well away from a record peak of $1.5983 hit earlier in the week and posting its steepest decline in nearly three weeks.

The euro zone single currency, however, got a brief boost on remarks by European Central Bank Governing Council member Klaus Liebscher. In an exclusive interview with Reuters, Liebscher said no room exists to cut euro zone interest rates, adding that he is not ruling out tightening in the region. For the interview, click on [ID:VIE001229].

The euro has jumped 8.4 percent to the dollar this year on the view European interest rates will stay put at 4.0 percent until later this year. The Federal Reserve, on the other hand, is seen cutting rates further from the current 2.25 percent.

More U.S. cuts would help keep euro zone rates significantly above those in the United States, keeping the euro's yield appeal intact.

Still, given the euro's ferocious gains in the past few months -- the euro sailed through $1.50 only two months ago -- analysts said the market was taking a breather ahead of $1.60.

Some market participants said euro selling would likely be short-lived, as ongoing inflation pressures will prompt the ECB to hold rates at 4 percent at least through autumn.

"By sticking to his guns and refusing to match the Fed's rate cuts, (ECB Jean-Claude Trichet's) credibility as an inflation fighter has ... been enhanced," said CIBC World Markets in a research note. "While we still expect an about-face and an ease by year-end, for now, the euro continues to benefit from the ECB's resolute stance."

(Additional reporting by Nick Olivari; Editing by James Dalgleish)