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Dollar rallies vs euro, trades at 6-month high

NEW YORK - The U.S. dollar rose to a six-month high against the euro on Friday and was on track for a fifth week of gains, amid signs the U.S. economic slowdown may be bottoming while growth in the euro zone stalls.

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The dollar has rallied broadly, in particular rising more than 5 percent against the euro this month, as investors shifted their view on the global economy's ability to withstand a downturn initiated in the United States.

Data in the United States on Friday showed an unexpected rise in manufacturing activity in the New York state area and an increase in industrial output and consumer confidence.

Meanwhile, reports on Thursday showed the euro zone economy contracted in the second quarter for the first time since the common currency's inception.

A steep drop in commodity prices also have lent support to the dollar's rally.

"We are clearly seeing position adjustment on the dollar, that pretty much continues," said Vassili Serebriakov, a currency strategist at Wells Fargo Bank in New York. "A lot of the dollar shorts have been taken off the table by now."

"The (U.S.) data has not been outstanding, but it has been positive enough not to stand in the way of those dollar gains," he added.

In midmorning trading in New York, the euro was down 0.7 percent on the day at $1.4700 EUR, after trading as low as $1.4680 -- its lowest since February, according to Reuters data.

The dollar index .DXY, which measures the value of the greenback against a basket of six currencies, struck a seven-month high of 77.252.

Versus the yen, the greenback reached a 7-1/2 month high of 110.66 yen JPY. The dollar's rally knocked an already floundering sterling to two-year lows near $1.85 GBP.

Also this week, the Bank of England warned of economic slowdown ahead and Japan said its economy contracted in the second quarter at the sharpest rate in seven years.

"It's not just the U.S. economy that has problems now, it's clearly spilling over to the rest of the world, we saw this yesterday with GDP numbers in Europe ... no one believes the European Central Bank is going to tighten any more and they're moving to price in a rate cut," said Martin McMahon, FX strategist at Credit Suisse in Zurich.

Goldman Sachs on Thursday said it was time to let go of its 10-year dollar bearish stance, revising its forecast for several U.S. dollar pairings. It now sees the euro falling to $1.45 in three months. The euro should drop further to $1.40 over the next 12 months, the bank said.

Dollar buying momentum has also been bolstered recently by the ongoing conflict between Russia and Georgia, as investors have favored the U.S. currency while a peace-deal is awaited.

Commodities drop

Crude oil CLc1 has fallen more than 20 percent from the all-time high above $147 set in July, while the Reuters-Jeffries/CRB index .CRB, a global index of commodity prices, has slid almost 18 percent from its July peak.

"People have been selling commodities that they funded out of dollars, so they've been needing to cover their commodity positions by buying dollars and that's generated a broad dollar rally," said Chris Turner, head of FX strategy at ING.

Crude oil prices slid further on Friday and were last trading 2.2 percent lower at $112.39 per barrel.

On the data front, the Reuters/University of Michigan Surveys of Consumers said its index of consumer confidence edged up to 61.7 in early August from 61.2 in late July. For details, see [ID:nN15341845]

Other reports showed U.S. industrial production edged up 0.2 percent in July and a gauge of manufacturing in New York state rose by a surprising amount in August.