Dollar rises as Citi news fuels model buying

NEW YORK (Reuters) - The dollar gained broadly on Tuesday as news that Citigroup Inc would sell a $7.5 billion stake to the Abu Dhabi government triggered a wave of buying from traders who rely on computer models.

The overnight Citigroup news restored confidence in battered U.S. banks, fueling a steep rally in the stock market.

The dollar rose sharply against the yen in the Tokyo session after the Citi report, sparking the unwinding of short positions on the greenback, and that rally spilled over to other currencies, traders said.

Investors interpreted Citi's move as a sign that financial institutions were repairing the damage from a meltdown in the U.S. subprime mortgage market and the resulting credit crunch, which has been a big factor behind recent dollar weakness.

"The Citigroup news has had an impact because it triggered some upward moves in dollar/yen. That fueled a lot of position squaring among model accounts," said Matt Kassel, director of foreign exchange at ING Capital Markets in New York.

"It has also carried over to the dollar/Swiss franc pair, euro/dollar, and moved to other currencies," he added.

The dollar pulled away from a 2-1/2-year low against the yen touched on Monday to trade at 108.85, up 1.4 percent from late Monday and on track for its biggest one-day gain since late August. The yen fell broadly as news of the Citi stake sale prompted a recovery in the Nikkei share index, fueling demand for relatively riskier assets.

"The willingness of a major Gulf investor to take an equity stake in a U.S. financial institution is clearly comforting for U.S. markets and current account financing concerns in that it suggests that longer-term-oriented investors with ample cash resources are beginning to see value in depressed U.S. financial assets," said Credit Suisse in a note to clients.

The dollar rose 0.8 percent against the Swiss franc to 1.1051. Sterling was down 0.1 percent against the dollar at $2.0688.

The euro fell 0.4 percent to $1.4825, more than a cent below last week's record highs at $1.4966. The single currency was little affected by remarks on Tuesday by German Finance Minister Peer Steinbrueck, who said he expected the economic upturn in the euro zone's largest economy to continue in 2008 despite the strong euro.

Nonetheless, there are signs the euro's exchange rate is starting to approach levels which could worry policy-makers.

ECB Governing Council member Nicholas Garganas told Reuters on Tuesday that recent euro gains against the dollar have been "sharp and abrupt" and such currency moves are not desirable.

U.S. economic data had little impact on currency markets.

The dollar pared gains against the yen but then recovered after a report showed U.S. consumer confidence fell for the fourth straight month in November to its lowest in two years on concerns about rising gasoline prices.

Comments by Federal Reserve Bank of Philadelphia President Charles Plosser, who is not a voter on Fed monetary policy this year, also had little impact on the currency market. He said U.S. interest rate cuts increase the risk of higher inflation.

On Wednesday, investors are expected to focus on the Fed's Beige Book report for clues on what the U.S. central bank intends to do at its monetary policy meeting on December 11. What would be of interest is the Fed's thinking on the balance between growth and inflation, analysts said.

"The semantic spin should intimate that another Fed rate cut is on the way in December and the only uncertainty in the market's mind should be by how much the Fed eases next month -- in terms of whether it is a quarter or a half point," said Bear Stearns in a research note.

(Additional reporting by Nick Olivari; Editing by Jonathan Oatis)