FOREX-Dollar mostly up, economic woes reduce risk tolerance

                                
 * Yen, dollar gain on rising risk aversion
                                
 * July 8-10 G8 meeting eyed for FX diversification debate
                                
 * U.S. June ISM shrinks at slower pace
                                
 (Recasts, adds comment, updates prices)
                                
 By Nick Olivari
                                
 NEW YORK, July 6 (Reuters) - The yen and the U.S. dollar
gained broadly on Monday as investors, worried over the global
economy's outlook, shunned risk and bought currencies perceived
to be safe.
                                
 Data showing the U.S. service sector shrank at a slower
pace in June from May failed to dent the overall market trend
on the day. <For related news click [ID:nN06223023].
                                
 But the upcoming G8 meeting and the possibility that it
will feature a discussion about diminishing the dollar's role
as the world's reserve currency could add to volatility.
[ID:nL5718493]>.
                                
 Currencies including the Australian dollar and sterling,
which have tended to benefit the most from any signs the global
economy is on the mend, fell sharply as the fallout from grim
U.S. jobs data last week continued.
                                
 Analysts said traders were coming to terms with signs
recent economic data have not been consistently better than
expected as in past months, and that it was possible for future
readings to show weakness.
                                
 "People are re-assessing their views of the economy here
and abroad," said John McCarthy, director of foreign exchange
at ING Capital Markets in New York. "Risk aversion is the
driving force."
                                
 Midway through the New York session, the dollar index,
which tracks its performance against a basket of six major
currencies, was up 0.1 percent on the day at 80.552 <.DXY>. A
fall in U.S. and European shares helped boost the U.S.
currency.
                                
 The euro fell 0.3 percent to $1.3927, its lowest in nearly
two weeks <EUR=>, according to Reuters data. Also prompting
euro weakness was a survey showing an unexpected worsening in
euro zone Sentix index, which tracks investor and analyst
sentiment. [ID:nBAF001721].
                                
 The yen was the biggest beneficiary of increasing aversion
to risk, pushing the dollar <JPY=EBS> down 1.3 percent to 94.76
yen on electronic trading platform EBS, around a one-month low.
                                
 The Japanese currency also rallied on the crosses, pushing
the euro down 1.5 percent to 132.27 yen <EURJPY=EBS>, its
weakest in nearly two weeks, while sterling <GBPJPY=EBS> fell
roughly 1.9 percent to 153.60 yen, its weakest since late May.
                                
 Sterling, which is often seen as higher risk, fell 0.7
percent versus the dollar to $1.6225 <GBP=D4>, according to
Reuters data. Earlier it fell to a one-month low of 1.6095.
                                
 The Australian dollar lost 0.8 percent to $0.7907 <AUD=D4>.
                                
 G8 SUMMIT IN FOCUS
                                
 This week also sees central bank policy decisions in
Australia and Britain, while in the United States major
companies begin to report earnings for the second quarter.
                                
 But the principal focus is the Group of Eight summit on
July 8-10, with investors watching for the possibility of a
debate on an alternative to the dollar as a world reserve
currency.
                                
 Though any diversification of central bank reserves away
from the dollar would take several years to materialize,
investors are jittery about what comments may be made at this
week's G8 meeting, particularly by China.
                                
 Analysts said they did not expect serious concerns to be
raised about the issue this week, but some said the dollar's
short-term vulnerability to comments about reserves suggested
improving global fundamentals in the future may open the door
to dollar weakness.
                                
 "While it may be too early to sell USD, the fact that the
discussion has become so public suggests that USD weakness
would accompany a global recovery as confidence is restored in
the medium and long term," Barclays analysts said in a note.
                                
 The dollar received some support by reassurances from
China, which said at the weekend that the U.S. currency would
remain dominant for "many years to come". [ID:nL691330]
                                
 In comments published on Monday, however, Chinese officials
said the financial crisis had laid bare defects in the
dollar-led global economy and the world should look to displace
the U.S. currency, even if it takes many years. [ID:nPEK337501]
                                
 The debate remains front and center, with India's Foreign
Secretary Shivshankar Menon saying on Monday, that India is
willing to discuss proposals to replace the U.S. dollar as the
global reserve currency.
                                
 "This would be one of the ideas which is on the table.
There have been ideas expressed, and we are ready to discuss
all of them," Menon told reporters when asked if India would
consider replacing the dollar. [ID:nCOL399882].
 (Additional reporting by Steven C Johnson in New York and
Naomi Tajitsu in London; Editing by Kenneth Barry)