* Oil prices coming off peaks lend dollar support
* Divergent euro zone-U.S. rate view still supports euro
* Swiss franc eases from record highs vs dollar
(Adds detail, U.S. data, updates prices, changes byline,
dateline; previous LONDON)
By Gertrude Chavez-Dreyfuss
NEW YORK, Feb 25 (Reuters) - The dollar rebounded against
the euro on Friday, boosted by a retreat in oil prices after
Saudi Arabia stepped up crude supply, with the currency
possibly attracting more flows if Middle East tensions
escalate.
The lower oil-higher dollar correlation may be in place for
now, but some analysts said the link could weaken and the
greenback could rise if the situation in the Middle East gets
out of control.
In mid-morning New York trade, the euro <EUR=EBS> was down
0.5 percent on the day at $1.3737. It hit session lows. at
$1.3720, reversing earlier gains which took it to the highest
against the dollar in more than three weeks.
The euro's early session strength was helped by
inflation-fighting rhetoric from euro zone policy-makers, which
added to expectations euro zone rates will rise faster than
that in the United States.
A weekly euro close above this year's highs at $1.3862, hit
in early February, leaves the euro poised for further gains
toward $1.40. This level was viewed as strong resistance, with
traders reporting Asian central bank offers defending an option
barrier at the $1.3840-50 area.
"The fact that oil prices came off their highs was a slight
benefit to the dollar," said John McCarthy, director of foreign
exchange at ING Capital Markets in New York. "The oil-dollar
correlation seems intact for now, but I don't know for how
long."
Higher oil prices typically undermine the dollar as the
United States is a major oil importer.
Top oil exporter Saudi Arabia said it was willing to step
in to make up for any shortages resulting from tensions in
Libya, pushing oil prices lower. [] U.S. crude futures on
Friday were down at $97.00 per barrel <CLc1>, coming off their
highs in more than two years.
ING's McCarthy said the market overall seemed wary of
pushing the dollar sharply lower despite the recent surge in
oil prices. If a civil uprising in Libya worsens or unrest
spreads to other parts of the Middle East, the ING trader said
the dollar could revert back to its traditional role as a
safe-haven currency.
The dollar was up 0.5 percent at 0.9311 Swiss franc <CHF=>,
having hit a record low of 0.9229 franc on Thursday. Market
commentators said the franc may face some liquidation of long
positions, especially if oil prices stabilise.
Against a basket of currencies, the dollar was up 0.4
percent at 77.382, not far from a 3-1/2 month low of 76.881.
The dollar briefly trimmed its gains against the euro
after a second reading of U.S. gross domestic product data
showed the economy grew slower than expected in the fourth
quarter.
For the U.S. GDP report, see [].
Analysts said the euro's intraday-bias remained on the
upside. Minor support was cited at $1.3704, Thursday's low.
Below $1.3704 will flip bias back to the downside for the euro
slide to $1.3427, this week's low, or possibly lower.
A break past $1.3862 would mark its highest level since
early November. Beyond there, resistance lies at $1.3947, the
76.4 percent retracement of a November to January slide.
Growing expectations for higher interest rates in the euro
zone while policy in the U.S. remains loose have supported the
euro, with European Central Bank policy-maker Axel Weber saying
on Thursday the only direction for rates was up. []
The U.S. dollar fell to a three-year low versus the
Canadian dollar at C$0.9797 <CAD=D4>, helped by elevated oil
prices and as traders took out an option barrier at C$0.9800.
( Editing by W Simon )
