Dollar moves higher after trouncing

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NEW YORK (Reuters) -- The dollar rose Friday, rebounding from vicious selling earlier this week, while data showing a plunge in euro-zone industrial production highlighted economic weakness in the region and pushed the euro lower.

Other recent top performers, including sterling and the Canadian and Australian dollars, also fell as oil prices dipped and G8 finance ministers prepared to start a meeting in Italy.

The dollar had spent most of the week under pressure as investors betting on a global recovery bought higher-yielding currencies and assets such as stocks and commodities, and traders said investors were largely taking profits on Friday.

"We're seeing a classic correction," said Brown Brothers Harriman currency strategist Meg Browne. "The top performers on the week are the worst performers today, suggesting the move is largely corrective in nature and will not be sustained."

The euro was down 0.9% at $1.3973 while sterling fell 1.1% to $1.6388 after having moved above $1.66 on Thursday. The dollar was up 0.6% at 98.18 yen and surged 1.7% against the Canadian dollar to to 1.1208.

Profit-taking on the euro accelerated after data showed industrial production in the 16-country euro zone plunged 21.6% in the year to April, a record fall that was steeper than economists' forecasts.

"I'm not surprised the figures are poor. The euro zone .... will suffer more than the rest of the world, ergo my view that the euro will underperform for quite some time," said Maurice Pomery, managing director at Strategic Alpha in London.

Exchange rates are not on the agenda at a two-day G8 meeting that starts on Friday, but analysts said they may come up in light of the dollar's recent slide, which has undermined euro-zone exports by making them more costly.

A French official told Reuters on Thursday that authorities were watching currency fluctuations closely. "What is damaging for the economy is the volatility of the currency markets."

Safe-haven demand boosted the dollar during the bleakest days of the financial crisis last year, but the euro rose 7% last month and is up 5.5% this quarter.

An index that measures the dollar against six major currencies is down 6% in the second quarter, reversing a 5% rise in the first three months of 2009.

"We wouldn't be surprised if the weekend meeting concluded with the finance ministers singing the merits of a strong dollar, partly to shore up any lingering worries over demand for U.S. assets ... but also to provide (euro zone) economies some support," strategists at Calyon wrote in a research note.

Some analysts, though, said the dollar's rally may gather steam. Matt Esteve, a strategist at Washington-based Tempus Consulting, said investors see the United States as likely to emerge from recession before the euro zone and are starting to reward the dollar for this.

Indeed, the dollar extended gains after a survey showed U.S. consumer sentiment rose to a nine-month high in June while inflation expectations ticked higher.

Last week, better-than-expected U.S. employment data even prompted markets to bet the Federal Reserve would hike rates by year end, though Esteve said that's unlikely before 2010.

"The theme emerging is that the U.S. is best positioned for economic recovery," Esteve said.