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FOREX-US dollar rises vs euro, gains vs yen on auto aid

* Euro falls sharply, hurt by ECB deposit rate cut

* Dollar up vs yen on White House auto aid plan

* Dollar draws support from BoJ rate cut to 0.1 percent (Adds comments, updates prices, changes byline, dateline; previous LONDON)

NEW YORK, Dec 19 (Reuters) - The U.S. dollar rallied against the euro on Friday, extending gains stemming from Thursday’s European Central Bank’s deposit rates cut, which eroded the appeal of the euro zone currency.

The dollar also gained versus the yen after the White House said it will provide loans to struggling U.S. automakers. The greenback earlier drew support from the Japanese central bank cutting interest rates to nearly zero.

The euro fell below $1.40 as traders also reckoned that its broad surge earlier this week may have been overdone. Despite the ECB move, the euro is on track post a weekly gain of over 4 percent against the dollar.

“The driver was the ECB’s move to cut its deposit rate yesterday...to discourage banks from depositing money with the ECB and to encourage them to rather lend them,” said Ronald Simpson, managing director of global currency analysis at Action Economics, in Tampa, Florida.

“What this ECB move did was, for all intents and purposes, it knocked down the euro’s interest rate advantage versus the U.S. So it made it less attractive to hold euros.”

In early trading in New York, the euro EUR= was down 2.3 percent at $1.3951 after hitting a low of $1.3909, according to Reuters data, retreating from $1.4720 touched on electronic trading platform EBS on Thursday, its strongest since late September.

“Given the fact that the strength in the unit was driven strictly by yield considerations, yesterday’s ECB move may have broken the will of euro longs,” said Boris Schlossberg, director of currency research at GFT Forex in New York, in a research note.

“Some analysts have calculated that the sudden rise in the euro this week was equivalent to a 175 basis points worth of tightening, prompting euro zone fiscal officials to raise concern over the volatility in the pair,” he said. “Today’s descent should ease some of those worries.”

AUTO HOPE

The dollar also drew support from news that the U.S. government will offer up to $17.4 billion in loans to the ailing U.S. automakers and expects General Motors GM.N and Chrysler LLC to access the money immediately, a senior administration official said on Friday.

Some $13.4 billion will be made available in December and January from the $700 billion fund that was originally designed to rescue struggling financial institutions, the official said. See [ID:nWBT010293].

The dollar rose as high as 89.70 yen after the announcement and last traded up 0.1 percent at 89.48 yen JPY=.

The euro fell 2.1 percent to 125.06 yen EURJPY=.

“The White House announcement should be a positive for stocks and risk appetite as it removes another major negative from the immediate outlook,” said a Forex.com analyst at Forex.com in Bedminster, New Jersey.

The Bank of Japan on Friday cut interest rates to 0.1 percent, providing some boost to the dollar as the monetary easing took the policy target rates of Japan and the U.S. to more or less equal footing.

The yen had surged in recent sessions climbing to its strongest level in more than 13 years, as concerns about the global economy prompted more investors to dump risky positions funded by cheap borrowing in the Japanese currency.

In a sign that the global credit crunch may be easing, central banks around the world announced their latest effort to pump cash into the financial system on Friday but noted overall demand for U.S. dollars has declined. See [ID:nLJ359063]. (Additional reporting by Gertrude Chavez-Dreyfuss in New York and Tamawa Desai in London; Editing by Walker Simon)

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