(Recasts first paragraph, adds comment, updates prices)
NEW YORK, Jan 18 (Reuters) - The dollar gained against the
euro and yen on Friday as rising equity markets calmed
investors, prompting a few to take on more risk.
The dollar's gains were bolstered by the preliminary
reading of the Reuters/University of Michigan consumer
sentiment index for January which came in higher than expected.
For more details see [].
"The fact that we got this unexpected increase in consumer
sentiment is a big boost to the market," said Nick Bennenbroek
head currency strategist at Wells Fargo.
The euro traded down 0.1 percent at $1.4644 <EUR=>. Against
the yen, the dollar rose 0.4 percent to 107.19 yen <JPY=>. All
three major U.S. stock benchmarks were higher.
The consumer sentiment index posted at 80.5 for the early
part of the month, compared with the median forecast of 74.5,
and up from the final reading of 75.5 in December.
Higher risk requires higher return and the relative calm in
stock markets around the world and increase in U.S. consumer
sentiment led some risk takers to move back into carry trades
where they borrow in a low-yielding currency such as the yen to
buy assets in higher yielding currencies like the Australian
dollar.
The Australian dollar rose 0.6 percent to 0.8823.
Investors cautioned, however, that the dollar's problems
are not over yet as the longer-term outlook for the U.S.
economy remains bleak.
"I can't remember the last time the data has been this bad
and the continued problems in banks mean that in the
medium-term the U.S. economy will continue to struggle," said
Colin Asher, currency strategist at Nomura in London.
But at least on Friday, the dollar was the safer play with
expectations increasing that the European Central Bank may cut
rates this year.
"The market is definitely nervous about any risk of the ECB
signaling that rates have peaked and that's keeping us in
relatively tight ranges," said Adam Cole, global head of
currency strategy at RBC Capital Markets.
BUSH PLAN
Expectations of a financial package U.S. President George
W. Bush is expected to propose on Friday, aimed at cushioning
the economy from a downturn, also helped lift some of the gloom
surrounding the U.S. economy.
U.S. Treasury Secretary Henry Paulson on Friday said that
there was an urgent need for a fiscal stimulus program to give
the slowing economy a boost but said the economy was not in
danger of stalling.
Federal Reserve Chairman Ben Bernanke, in testimony before
the House of Representatives' Budget Committee on Thursday,
also backed the idea that the struggling economy needed
rescue.
Interest rate futures have already fully priced in a
half-percentage point cut from the Fed at its regular policy
meeting on Jan. 29-30, with some seeing an even broader 75
basis point cut.
Markets also turned more bearish on the UK economy as weak
retail data figures prompted investors to price in a higher
probability of imminent rate cuts and to sell the pound
<GBP=>.
"More people are now starting to price in the possibility
of a 50 basis-point cut at the February MPC meeting," said
Asher at Nomura, adding that he did not think this was likely.
Sterling/dollar was down 0.5 percent at 1.9601.
Separately, a closely watched index of future economic
activity dropped for a third straight month in December,
implying growth will remain sluggish and faces rising risks of
weakening, the Conference Board said on Friday. More details,
see [].
(With additional reporting by Gertrude Chavez-Dreyfuss and
Steven C. Johnson)
(Reporting by Nick Olivari; Editing by Theodore d'Afflisio)
