Rising dollar has best week vs euro since June

NEW YORK, Aug 19 (Reuters) The dollar edged up against a basket of major currencies for the fifth straight session on Friday, tacking on its biggest weekly gain against the euro since early June. A series of U.S. economic reports this week a strong reading of the Philadelphia Federal Reserve Bank's index of business activity and data showing strong capital inflows to U.S. assets have bolstered the case for continued dollar supportive interest rate hikes by the Federal Reserve. Investors "are putting money into dollars," said JoeFrancomano, vice president of foreign exchange at Erste Bank. "It's a safe trade given the rate outlook." The dollar index <.DXY> rose to its highest since Aug. 3 at88.90 before paring gains, to 88.58 by late afternoon. The euro was down 0.1 percent from Thursday at 1.2165, after falling as low as 1.2127 its lowest since Aug. 1. The euro is down 2.4 percent this week, its biggest weekly decline since the week ended June 5. However, the euro is almost right in the middle of a summer long trading range, suggesting investors are comfortable waiting for a significant breakout in either direction. "The price action is bound to undermine the conviction of both the dollar bulls and bears," said Marc Chandler, partnerwith Terra K Partners LLC, a financial firm in New York. "And with the summer holidays here and the absence of much in the way of key economic data, the simplest and most likely scenariois for a range trading affair," he said.

Speculators established a small net short dollar position for the first time in over four months, according to the latest IMM data for the week ended Aug. 16. As a testament to recent strength in sterling, short term investors have flipped to a net long position in the currencyfor the first time since early May. Sterling was relatively unchanged at 1.7964, whilethe dollar was up 0.2 percent against the Swiss franc at 1.2745 francs. The dollar also hit a one week high of 110.83 yen before trimming its gains to 110.43 yen, nearly flat from the prior session.
Technical analysts at Merrill Lynch said the dollar fell slightly short of closing above the key level of 110.80 yen.
"A decisive close above this level would neutralize third quarter downside risk, and improve the opportunity for a renewed challenge to 113.00," they wrote in a research note. Analysts say investors will remain cautious about buying yen aggressively ahead of Japan's Sept. 11 election, although expectations are rising that Prime Minister Junichiro Koizumi will gain public support for his reform plans. Little major U.S. economic data are due next week, and Japanese trade figures are due only on Thursday, leaving markets stuck in waiting mode.