* Dollar up vs euro as funds seek to square books
* Federal Reserve's rate cuts cool some risk aversion
* Higher-yielding currencies gain, yen slides
* U.S. GDP declines less than expected in 3rd quarter
(Recasts, updates prices, adds quotes)
By Gertrude Chavez-Dreyfuss
NEW YORK, Oct 30 (Reuters) - The U.S. dollar rallied against
the euro on Thursday, buoyed by demand from U.S. corporations
and global fund managers seeking to square their books or
rebalance their portfolios by month-end.
The yen, on the other hand, retreated against most major
currencies after the Federal Reserve's interest rate cut on
Wednesday eased risk aversion, boosting equities worldwide.
"People are looking at the month-end tomorrow and the
market is expecting massive demand for dollars," said Richard
Franulovich, senior currency strategist at WestPac Banking
Corp. in New York.
"So there's a lot of fund managers all over the world
that's going to buy U.S. dollars. There's probably a lot of
nervousness about that."
Fund managers worldwide are expected to buy substantial
amounts of dollars as the month-end approaches to neutralize
hedges because of the reduction in their portfolios.
In midday New York trading, the euro <EUR=> was down 0.8 at
$1.2855 in volatile trade, pulling away from intra-session
highs at $1.3300, but well above a 2-1/2-year low of $1.2329
hit this week on electronic trading platform EBS.
The ICE Futures dollar index, which measures the dollar's
value against six other major currencies, was up 0.5 percent at
85.051 <.DXY>.
Data released earlier showing a smaller-than-expected
contraction in the U.S. economy in the third quarter
underpinned sentiment on risky assets, including
higher-yielding currencies.
Still, the fall in U.S. gross domestic product in the last
quarter was the sharpest contraction in seven years.
Analysts were also mostly skeptical about the market's
renewed optimism, noting that a recovery in stocks and
higher-yielders such as the Australian dollar may not last
beyond two days.
"Look at what happened when the Treasury and Europe
announced their bailout plans, the rebound lasted just one to
two days," Franulovich said. "I don't see this current market
recovery being anything different and you can see that gains
are coming off a bit."
DOLLAR DEMAND TO STAY FOR NOW
The dollar climbed 0.3 percent against the yen to 97.710
yen <JPY=>, extending its recovery from a 13-year trough just
below 91 yen touched on EBS late last week.
Sterling <GBP=> fell 0.8 percent against the dollar to
$1.62933, after trading higher earlier. The Australian <AUD=>
and New Zealand <NZD=> dollars, on the other hand, rose roughly
0.7 percent and 0.2 percent respectively.
U.S. stocks were up at midday, but were off their highs for
the day. Earlier, Japan's Nikkei stocks average <> surged
nearly 10 percent.
Higher share prices showed that the extreme risk aversion
following the meltdown in the banking sector that had triggered
waves of selling in past weeks had abated.
The rebound in stocks and high-yielders came after the
Federal Reseve reduced borrowing costs by a half percentage
point to 1 percent on Wednesday and left the door open for
further easing of monetary policy.
The Fed also approved on Wednesday currency swap lines with
central banks in several major emerging countries, making
dollars available to help them deal with the credit crunch.
Overall, despite a slew of measures to ease the credit
crunch and boost risk appetite, markets are still quite fragile
while the economic benefits are limited, analysts say. Market
participants believe demand for U.S. dollars would remain
intact.
"Dollar-weakness (in recent sessions) has been more about
dollar longs being unwound as opposed to an active interest to
short the dollar," said Divyang Shah, chief market strategist
at Commonwealth Bank of Australia.
"The bias remains for volatility to remain in play and more
importantly the demand for dollars to remain."
(Editing by Leslie Adler)
