The dollar slipped on Monday after Dubai's announcement it had received help from Abu Dhabi to repay its debts bolstered risk appetite and eroded some of the U.S. currency's safe-haven appeal.

The currency market's bent to sell dollars on improved risk appetite -- global equities bounced on the $10 billion bailout -- contrasted with last week when strong U.S. economic data boosted risk sentiment to the benefit of stocks and the dollar.

The dollar index retreated on Monday from its highest in more than a month hit last week, after Abu Dhabi agreed to bail out its debt-laden neighbour with $10 billion in aid, easing worries about a possible debt default by Dubai.

The bailout announcement also triggered selling in the low-yielding yen. But the initial dollar and yen weakness fizzled out as the European session progressed, particularly in the yen as traders cited talk of Japanese repatriation.

The euro's gains were also capped as Dubai's debt issues underlined fiscal concerns in other countries, including Greece, whose credit rating was cut last week.

There's been an improvement in the performance of risky assets and risky currencies today ... and the mood is more upbeat, said Standard Chartered FX strategist Rob Minikin.

There was an initial dollar sell-off in some of the major crosses, but that's somewhat lost momentum. The sense is that the dominant theme in recent weeks was one in which credit jitters outside the U.S. were dollar constructive but that has unwound a little bit today, he said.

At 1235 GMT the dollar index, a measure of the greenback against six major currencies, was down 0.2 percent at 76.417 .DXY, capped by resistance at the 100-day moving average of 76.691. Last week it hit a near six-week high of 76.726.

The euro was up 0.2 percent at $1.4650, having climbed to around $1.4685 after Dubai said it had received funding from Abu Dhabi to help repay $4.1 billion in an Islamic bond maturing on Monday.

Last month, news that government-controlled holding company Dubai World might default rattled financial markets and led to a sell-off in the euro and riskier assets, including the high-yielding Australian dollar.

The euro barely moved after euro zone employment and production figures. Late last week, it hit a two-month low of $1.4586 on the EBS trading platform on the back of strong U.S. retail sales and consumer sentiment figures.


The dollar fell 0.6 percent to 88.50 yen, unable to sustain a jump to around 89 yen after Dubai's announcement. Traders cited Japanese exporters selling the greenback after its rise.

The retreat in dollar/yen helped to prompt a broad buy-back in the yen, which recovered from initial selling against higher-risk currencies, including sterling and the Australian and New Zealand dollars.

The market's reaction to the Dubai news was relatively positive, but there remain question marks relating to the broad issue of sovereign risk, which will be one of the themes going into 2010. said Ned Rumpeltin, currency strategist at Nomura.

Traders were also looking ahead to a two-day Federal Reserve policy meeting, which begins on Tuesday.

The U.S. central bank is likely to keep rates unchanged near zero, but the focus will be on the accompanying statement and whether the Fed reiterates a dovish bias and does not fully acknowledge the recent run of strong data.

The surprisingly strong reading of U.S. consumer data on Friday, coming on the heels of a lower-than-expected fall in non-farm payrolls earlier this month, had boosted the dollar.

Such signs of recovery in the U.S. economy have raised some speculation in the market that the Fed may wind down loose monetary policy sooner than markets had been expecting.

We had a one-two punch of the payrolls and the retail sales data, so maybe the market is getting optimistic about a U.S. recovery, said Rumpeltin at Nomura.

But we don't think the market should get ahead of itself and start to anticipate an early Fed rate rise.