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LONDON, Fri Aug 15, (bdnews24.com/Reuters) - The dollar powered to a six month high against the euro on Friday, boosted by jitters on shrinking euro area economic growth with extra fuel from position liquidation in commodities and energy markets. The dollar's push higher knocked an already floundering sterling to a 22-month low approaching $1.85, while the US currency also struck a seven-month high against a basket of six major currencies.
Commodity markets hit the slopes as the dollar's rally found fresh legs, led by a near 3 percent slide in gold and oil falling almost 2 percent.
The dollar-led liquidation of long positions across the commodity spectrum later played to the US unit's advantage, fuelling further gains.
Reflecting the severity of commodity losses, the Reuters-Jeffries/CRB index has fallen almost 18 percent since early July.
"The fall in commodities is allowing the market to look beyond the short-term inflation shock and towards the weak growth and longer term inflation outlook. This is an argument in favor of the dollar and against the euro and sterling as markets move to price in rate cuts," said Lena Komileva, G7 economist at Tullett Prebon.
"At the same time, following this week's U.S. CPI and trade data, it looks like the second quarter for the U.S. will look strong in terms of growth as well as inflation and that makes the current 2 percent Fed Fund target unrealistically low," she added.
Among the key milestones achieved in the past two weeks, the dollar index snapped a three-year downtrend and broke above its 200-day moving average for the first time in 2-1/2 years.
By contrast, sterling looks set to close below its 200-day moving average around the $1.9020 area this week, seen by technical analysts as a key bear signal.
By 0747 GMT (3:47 a.m. EDT), the euro was down half a percent on the day at $1.4720, its lowest since February.
The euro was hurt on Thursday by data showing the euro zone economy contracted in the second quarter for the first time in the single currency's lifetime, while U.S. consumer prices accelerated to a 17-year high in July.
The dollar has rallied cross the board, rising more than 5 percent against the euro this month alone, as investors shifted their view on the global economy's ability to withstand the U.S. downturn.
WAVE GOODBYE TO DLR WEAKNESS?
The dollar index, which measures the value of the greenback against a basket of six currencies, struck a near seven-month high of 77.128. The U.S. unit also gained half a percent to 110.34 yen, near a seven-month high hit earlier in the week.
Goldman Sachs on Thursday said it was time to let go of its 10-year dollar bearish stance.
"The valuation and growth driven improvements that we have been observing for a while have reached the point where they notably improve the medium to long-term outlook for the dollar," Goldman said in a note to clients.
The bank warned however that while a clear technical break suggested further dollar strength, the near-term outlook remained uncertain.
Dollar buying momentum has also been bolstered this week by the Bank of England warning this week of economic pain ahead and Japan's economy contracting in the second quarter at the sharpest rate in seven years.
Looking ahead, the Reuters/University of Michigan sentiment survey --released at 1355 GMT (10:55 a.m. EDT) -- is expected to show a reading of 62.0 in August, a slight improvement from 61.2 in July.
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