Dollar falls back from 2008 high on profit taking

By Jamie McGeever

LONDON (Reuters) - The dollar eased back on Wednesday as dealers cashed in on the currency's jump the previous session to 2008 highs against a basket of currencies.

A rebound in oil prices, as well as persistent concern about the U.S. economy and banking system, also helped trigger the bout of profit-taking.

The euro had slid on Tuesday to a six-month low after a report showed the Ifo index of German business confidence slumping to a three-year low, dragging other currencies with it.

The data deepened the sense of gloom surrounding the euro zone and other economies relative to the United States, which lifted the dollar to its highest level for the year against a basket of currencies.

Such a sharp rise, however, gave traders an opportunity to book some profits on Wednesday, especially with little in the way of major economic data or market-moving developments changing the general environment of dollar strength.

That despite the Federal Deposit Insurance Corp (FDIC) alluding to the extremely fragile state of the U.S. banking system on Tuesday. Minutes of the Federal Reserve's last Open Market Committee meeting also hinted weak financial conditions and growth would see interest rates on hold for some time.

"The dollar seems to have checked its advance," said Geoffrey Yu, currency strategist at UBS in London.

"Investors are finding it hard to find reasons to get into the dollar and chase this move further (right now). We are still positive in general on the dollar -- we see the euro at $1.40 by year end -- but it's probably wise to exercise some caution."

At 0750 GMT the euro was up half a percent on the day at $1.4730, bouncing back from a six-month low of $1.4570 reached in the previous session on trading platform EBS.

The dollar index, a measure of the greenback's value against six major currencies, fell half a percent on the day to 76.84 .DXY, having hit a 2008 high on Tuesday at 77.619.

Sterling rose 0.4 percent to $1.8463, after slumping to a two-year trough of $1.8330 on Tuesday and the dollar fell 0.5 percent against the yen to 109.05 yen.

DON'T BANK ON IT

A $1 increase in oil prices to above $117, in part supported by fears that Tropical Storm Gustav may threaten oil facilities in the Gulf of Mexico, also reinforced dollar selling on Wednesday.

The dollar and oil tend to be inversely correlated. High oil prices hit the U.S. consumer, whose spending accounts for some 70 percent of the U.S. economy.

But the dollar is expected to be broadly supported by global economic deterioration even as the Fed seems likely to keep rates on hold in the coming months.

Other central banks in the euro zone, Britain, Australia and New Zealand are expected to lower rates at some stage or other in order to shield their economies from the threat of recession.

Analysts think the Fed is likely to raise U.S. interest rates by around 50 basis points from the current 2.0 percent by next August.

Still, the fragile U.S. banking system remains a concern for investors.

The FDIC said on Tuesday that more banks than at any time since 2003 might go to the wall, and the Wall Street Journal reported that the FDIC might have to tap Treasury funds to see it through the expected wave of bank failures.

"We can't help but think that the leg down in euro/dollar is overdone when held up against the U.S. macroeconomic backdrop and the drip feed of poor news out of the U.S. financial system," wrote Societe Generale FX strategists in a client note.

In economic data, U.S. durable goods orders for July are due at 1230 GMT and August German inflation figures will be released later.

(Reporting by Jamie McGeever, editing by Patrick Graham)