* Dollar at 6-month high on index, euro weak
* Busy week ahead with ECB, payrolls, Volcker
* Speculation on limiting carry trades weighs on yen crosses
By Charlotte Cooper
TOKYO, Feb 1 (Reuters) - The dollar held at its highest
levels in six months on Monday, while the euro huddled near
seven-month lows on fiscal concerns, and higher-yielding
currencies remained pressured by the closing of leveraged trades.
The Australian dollar dipped to its lowest since mid-December
as investors briefly unwound yen-funded carry trades on a report
that a British regulator would like to restrain such trading.
Political worries, such as China's weekend protest over U.S.
arms sales to Taiwan amounting to $6.4 billion, kept sentiment
edgy following concerns in the past two weeks about Beijing's
credit tightening and U.S. proposals to limit risk-taking by
banks.
The euro teetered at its lowest level since July, holding
just above $1.3850 <EUR=>, where one trader reported talk of a
barrier yet to be triggered. It tested that level several times.
"The ongoing slide in risk appetite is still the key," said
Greg Gibbs, FX strategist at Royal Bank of Scotland in Sydney.
"It feels somewhat negative for the commodity currencies at
the moment and a bit better for the U.S. dollar."
Stronger-than-expected gross domestic product data late last
week reinforced the view that the United States is recovering
from recession faster than the euro zone and Japan.
Now markets are bracing for a number of major central bank
meetings across the world and a raft of U.S. economic reports,
culminating in non-farm payrolls data on Friday. [].
Paul Volcker, a member of the Obama administration's economic
team and a former Federal Reserve chairman, will testify on
Tuesday to a Senate committee on the latest White House bank
regulation proposals. []
"Besides the U.S. jobs report, the focus this week is what
Volcker will say about the banking rules," a senior FX manager
for a British bank said.
The dollar index, a measure of the greenback's performance
against six major currencies, rose as far as 79.534 <.DXY>, its
highest since late July, but struggled to clear 79.50 decisively
and later hovered at 79.48.
The index has a target just above 80, a 38.2 percent
retracement of its fall between March and late November.
The dollar index had a strong negative correlation with the
S&P 500 index <.SPX> last year, meaning when the share index went
up the dollar index was highly likely to go down and vice versa.
The correlation has now turned mildly positive on a 90-day
rolling basis, standing at about 0.3 on Monday. Analysts said the
strong negative correlation had manifested itself when risk
aversion was a key market theme, and if the theme shifted to
interest rate expectations that correlation would be likely to
change.
However, pressure on the euro from Greece's fiscal problems
was another influence on the dollar outside stocks, meaning it
was too early to draw conclusions from the shift.
"It's still very ambiguous because the Greece story is a risk
aversion story and is driven not by U.S. factors but euro zone
factors," said Tomoko Fujii, a senior currency strategist at Banc
of America Securities-Merrill Lynch.
"My guess is (a change) will take time, unless Friday's
employment report proves really good and strong."
The euro traded at $1.3883 <EUR=>, up 0.1 percent on the day
after falling 0.8 percent on Friday, but it dipped as far as
$1.3852 on trading platform EBS.
The euro lost more than 3 percent last month as concerns
mounted about the fiscal health of some of the smaller euro zone
countries including Greece and Portugal.
Latest data from the Commodity Futures Trading Commission
showed speculators increasing their short positions against the
euro and going long on the dollar.
The value of the dollar's net long position was $3.11 billion
in the week to Jan. 26, reversing a net short position of $3.12
billion in the previous week [].
The euro fell 0.1 percent to 125.25 yen <EURJPY=R>, after
dipping below 125.00 to not far from its April low of 124.38 yen,
with talk of option barriers at 124.40 yen.
The dollar also slipped 0.1 percent to 90.23 yen <JPY=>,
holding at its 100-day moving average at 90.25.
The yen gained ground from Friday on the Australian dollar,
helped early by an online report by the Times newspaper.
The report quoted the head of Britain's Financial Services
Authority as saying he would like to restrain carry trades, in
which investors borrow at low rates in one currency, such as the
dollar or yen, to buy a higher-yielding currency [].
The market also trimmed the probability of a 25 basis point
rate rise by the Reserve Bank of Australia on Tuesday, although
in a Reuters poll 20 economists expected a hike. []
The Aussie was at its lowest levels since mid-December to
stand at 79.63 yen <AUDJPY=R>. It slipped to its lowest in a
month against the U.S. dollar, hovering just above $0.8800
<AUD=D4>.
(Additional reporting by Anirban Nag in Sydney and Satomi
Noguchi and Kaori Kaneko in Tokyo; Editing by Michael Watson)
