* Dollar firm as euro on defensive, rally overblown
* Dollar index up 0.2 pct <.DXY>
* Moves exacerbated by thin holiday conditions
* Euro zone mfg PMI falls to 33.9 in December, 11-yr low
(Updates throughout, changes dateline prvs HONG KONG)
By Tamawa Desai
LONDON, Jan 2 (Reuters) - The dollar started 2009 on a firm
tone on Friday, with the euro on the defensive after retreating
broadly earlier in the session on perceptions that the single
currency's recent rally may have been overdone.
A fall in euro zone manufacturing activity to an 11-year low
didn't help the already soft sentiment toward the euro, while
trade was choppy as liquidity remained thin with Tokyo and other
Asian markets closed for the New Year holidays.
The euro lost ground against the dollar and fell back from
record peaks against sterling, as a drive towards parity ran out
of steam.
"There was a lot of profit-taking in long dollar positions
(in recent sessions). Illiquid markets have exacerbated the
euro's recent rally," said Lee Hardman, currency economist at
Bank of Tokyo-Mitsubishi UFJ.
Market players were also starting to turn against the euro
on the view that European growth will likely suffer for longer
on expectations the European Central Bank will continue taking a
gradualist approach to cutting rates, compared with other
central banks which have eased aggressively.
By 0908 GMT, the euro <EUR=> was down 0.3 percent against
the dollar at $1.3949, having earlier hit a session low of
$1.3841.
The single currency was at 95.54 pence <EURGBP=D4>, after
dropping more than one percent in Asian trade, taking its losses
in the past two trading days to three percent.
Earlier this week it hit a record 98.05 pence.
"The fall in euro/sterling is likely the result of
profit-taking on sterling shorts with the pair having been deep
in overbought territory and most of the bad news for the UK
economy having already been priced in," said David Powell,
currency strategist at Bank of America.
On the data front, the final reading of the Markit Eurozone
Purchasing Managers Index (PMI) for the manufacturing sector
fell to 33.9 in December, a low not seen in the survey's 11-year
history and well below the 34.5 flash estimate and 34.5 forecast
by economists.
Traders will also keep a close eye on U.S. Institute for
Supply Management's December manufacturing index at 1500 GMT on
Friday. Markets expect a reading of 35.5 versus 36.2 in
November.
The dollar index, a gauge of its performance against six
major currencies, rose 0.2 percent to 81.30 <.DXY>.
Against the yen, the dollar was up 0.3 percent to 91.10
<JPY=>.
Although extremely volatile moves seem to have subsided
recently, risk aversion is expected to remain a factor in 2009,
especially as major economies are headed for a steep downturn
before recovery.
"Financial conditions may continue to improve gradually, but
economic distress will likely keep risk aversion high," said
BTM-UFJ's Hardman.
