Dollar slips, but eyes best month in over 10 years

By Jamie McGeever

LONDON (Reuters) - The dollar slipped on Friday, shrugging off surprisingly strong U.S. growth figures from the previous day as dealers opted instead to take more profits from the currency's steepest monthly rise in over a decade.

The U.S. currency was also sold as oil prices rebounded one percent after a newspaper reported Russia might tighten supply and as Tropical Storm Gustav headed for the U.S. Gulf Coast.

Sterling was hit harder, plumbing a new 12-year low on a trade-weighted basis on concern about the UK economy's weakness.

Friday is likely to be a shortened global session as U.S. traders leave early for Monday's Labor Day holiday and the main focus was expected to be euro zone and U.S. inflation data and the latest snapshot of regional U.S. business activity.

Dealers were expected to try to square positions by selling into any dollar strength before the end of the month and before next week's August U.S. employment report and central bank policy decisions in the euro zone and UK.

"We've had a strong run for the dollar ... (and) some traders, especially in the States, might not be willing to run with it over the weekend," said Steve Barrow, G10 currency strategist at Standard Bank in London.

"What we've seen in the last week or so has been consolidation, but it's still consistent with fairly bullish (longer-term) momentum for the dollar," Barrow said.

At 0745 GMT the dollar index .DXY was down a quarter of a percent on the day at 76.92.

Earlier this week it rose to 77.619, its highest this year, and it has gained over 5 percent so far this month, its best month since January 1997, Reuters charts show.

Meanwhile the euro has fallen 5.5 percent this month, its steepest since its launch in 1999. The single currency was up a third of a percent on the day at $1.4750, holding above $1.4567 hit on Tuesday, the lowest level since mid-February.

The dollar was down two thirds of a percent against the yen at 108.76 yen and sterling was down a quarter of a percent against the euro at 80.60 pence per euro.

TOO FAR TOO SOON?

Stephen Jen, head of global currency strategy at Morgan Stanley, said the dollar was poised to extend its gains in the months ahead as the rest of the global economy sagged and the United States emerged from its slowdown, and as the surge of U.S. investments abroad in recent years were unwound.

Revised U.S. growth data on Thursday showed the economy expanded at a brisk 3.3 percent in the second quarter but failed to buoy the dollar, which had already racked quick gains.

"Though a stronger dollar is consistent with our forecasts, the recent dollar rally was more violent than we had expected. The dollar will continue to appreciate, albeit in a more tentative and asynchronous manner than we have seen in the past month," he wrote in a note to clients.

The dollar came under some pressure on Friday from oil's rise back above $117 a barrel, boosted by a report in Britain's Daily Telegraph that Russia may restrict oil shipments in the coming days in response to the European Union's threat of sanctions over its military action in Georgia.

Meanwhile, sterling was on track for a near-8 percent fall against the dollar in August, its biggest monthly drop since October 1992 when the UK was ejected from the Exchange Rate Mechanism.

The pound fell to a 12-year low on a trade-weighted basis of 89.8 and inching close to a record low against the euro after disappointing UK housing figures offered even more signs of a fragile economy.