FOREX-Dollar recovers from six-month low after year-end selloff

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NEW YORK, Jan 2 (Reuters) - The dollar recovered from a six-month low to add 0.44% on Thursday, the first trading day of 2020, ending a four-day losing streak and a downbeat December that had left the index virtually flat at the end of 2019.

Trading is likely to remain thin until Tuesday, when most European countries open after Monday’s Epiphany holiday but market players will be relieved that the dollar navigated the holiday period without experiencing the money market squeezes many had feared.

The dollar index slumped 0.4% on New Year Eve as large banks took only a small portion of the $150 billion offered by the U.S. Federal Reserve’s overnight repo operation and borrowing costs fell to the lowest level since March 2018.

While worries remain that there could be a repeat of last January’s so-called flash crash, when massive stop-loss selling swept through holiday-thinned currency markets driving the Japanese yen up dramatically against the Australian and U.S. dollars, analysts said the Fed’s liquidity injections had reduced the risk.

“The liquidity squeeze didn’t materialize so that’s contributing to stability in broader financial markets,” said Lee Hardman, senior FX strategist at MUFG.

“But the dollar story has been turning negative in recent months, partly because of action taken by the Fed to ease dollar liquidity,” Hardman said, referring to the U.S. central bank’s balance sheet expansion relaunched in October.

Having ended December almost 2% lower against a basket of currencies, the dollar index inched up to 96.805 while against the euro it was at $1.117, knocking the single currency from its highest level since early August of $1.125.

The dollar index ended the year virtually flat, after a fall in December erased the greenback’s outperformance for most of 2019. December’s drop was primarily attributable to lower demand for the dollar as a safe-haven asset as trade tensions with China eased and global growth prospects picked up.

Investors are now waiting for the U.S. ISM manufacturing survey due on Friday. Across much of Asia and Europe, final purchasing managers indexes painted a slightly brighter picture, with French, German and euro zone readings a touch better than advance PMIs. But they also confirmed an 11th straight month of contracting euro zone activity.

The euro slipped 0.33%, having strengthened 1.8% against the dollar last month. However, euro zone bond yields extended their rise and inflation expectations rose to the highest since July.

U.S. President Donald Trump said on Tuesday that Phase 1 of a trade deal with China would be signed on Jan. 15 at the White House. Markets are awaiting further details.

Reporting by Kate Duguid and Sujata Rao; Editing by Will Dunham