Dollar Weakens As Nerves Subside 

  LONDON (Dow Jones)--The dollar sank in European trading hours Monday as generally brighter investor sentiment trimmed demand for what's seen as a safe currency to hold in times of stress.

The euro shot higher, breaking above points of technical resistance against the U.S. currency, as somewhat improved sentiment alongside the lack of any fresh negative news on euro-area banks and finances prompted some traders to scale back negative bets.

Data showing a record 9.5% rise in annual euro-zone industrial output during April also helped the move, with the single currency shooting to over $1.2230--a 1% rise from the lowest point of the day.

"April's sharp rise in euro-zone industrial output indicates that the recovery in the export-sensitive industrial sector has been little affected so far by the region's fiscal woes," said ING economist Martin van Vliet.

Broadly upbeat sentiment in global financial markets also supported the rise in the 16-country currency, which was echoed by modest weakness in so-called safe haven currencies, among them the yen and the Swiss franc, which tend to perform best when investors are nervous.

"No news is good news for the euro," said currency analysts at Commerzbank in Frankfurt. "[As long as] the issue of peripheral country bonds goes well, and as long as the European Central Bank does not commit any massive communication errors, the euro has potential for recovery," they said, adding that this trend is also likely to continue pushing the yen lower.

See the euro's performance against the dollar here:

http://www.dowjoneswebservices.com/chart/view/4128

Sterling also moved higher, as nerves stabilized and a new independent government department cut the country's borrowing forecasts. The Office for Budget Responsibility said that the U.K. will need to borrow GBP106 billion in 2012 to 2013, from GBP110 billion seen earlier.

In addition, a weekend newspaper article by Bank of England monetary policy committee member, Andrew Sentance, hinted that higher interest rates may be needed sooner than expected to fight persistent inflation. That provided the pound with fuel for a modest rise against both the dollar and the euro.

With no clear positive catalyst, rises in riskier currencies and weakness in the yen may not last long, analysts said. However, it may continue as a robust short-term trend, particularly as measures of speculative bets also point to some dollar weakness from current levels.

Data Friday from the Commodity Futures Trading Commission showed that negative bets on the euro had again approached a record high in the week up to June 8, while positive bets on the dollar had hit an all-time high.

Such extremes in positioning raise risks, analysts warned. "The fact that the data revealed net aggregate long dollar positions reached an all-time high last week, highlights the potential for profit-taking this week," said Mitul Kotecha, chief currency analyst at Credit Agricole in Hong Kong in a note to clients.

Overnight in Asia, the Korean won showed little reaction to the widely-expected capital controls that were introduced in the country over the weekend.

In European emerging markets, there were small gains for the Hungarian forint and the Polish zloty, in a move attributed to improving general sentiment. The euro dropped from almost HUF282 to around HUF280 over London trading hours.

At 0922 GMT, the euro was trading at $1.2235, up from $1.2077 late in New York Friday, according to trading system EBS. The dollar was a shade higher at Y91.91 against the yen, from Y91.62, while the euro was up at Y112.45 from Y110.65. The U.K. pound was higher at $1.4731 from $1.4516.

The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was down at 86.566 from 87.508.