Dollar retreats as oil, commodities gain

[NesmithDJ]

* Euro up 0.4 percent at $1.4750, off earlier 6-month low

* Rebound in oil and gold drags dollar off high vs euro

* Dollar recovery seen as sustainable

By Simon Falush

LONDON, Aug 18 (Reuters) - The dollar retreated from a six-month high against the euro on Monday as an overnight recovery in oil and commodity prices prompted a pause in the U.S. currency's dramatic recovery this month.

Oil rose at one stage more than $1 to above $115 a barrel CLc1 on supply concerns and gold tested <XAU=> the $800 level, well off a nine-month low and helping the Aussie dollar climb.

Higher oil and commodity prices are also seen as U.S. dollar negative as they add to pressure on a fragile U.S. economy where consumers and businesses are struggling to meet higher costs.

"There's been a retracement in the dollar, partly on profit taking but mainly because commodities have moved back higher, and commodities seem to be wagging the FX market dog," said Jeremy Stretch, strategist at Rabobank.

The euro has tumbled nearly 6 percent against the dollar in just two weeks as investors grow increasing concerned that the slowdown in the U.S. economy is set to spread to Europe and the rest of the world.

Last week's data showed euro zone growth contracted in the second quarter for the first time ever, helping scotch any expectations of euro zone rate increases.

The dollar meanwhile is getting broad support from the view that the Federal Reserve, having cut rates by over 300 basis points over the last year, has probably ended its easing cycle.

The euro fell to a six-month low of $1.4645 on trading platform EBS in early Asian trade before recovering to $1.4744 <EUR=>, up 0.4 percent from late Friday U.S. trade.

The dollar also retreated 0.25 percent to 110.22 yen <JPY=> while the euro gained 0.2 percent to 162.56 yen <EURJPY=>.

The dollar index, which measures the dollar's value against a basket of six currencies, fell 0.3 percent to 76.906 .DXY, down from a seven-month high of 77.268 struck on Friday.

The euro is broadly seen as vulnerable to further falls as investors reposition their portfolios to catch up with the rapid rise of the dollar.

"The massive repositioning of the market, reflected in IMM data, has lent considerable momentum to the dollar," said Calyon in a note to clients, saying forecasting a floor level for the euro "is now akin to catching the falling knife".

Monday is very quiet for data but investors will look to Germany's ZEW gauge of economic sentiment and euro zone service sector activity later in the week for more clues on the extent of headwinds affecting the euro zone economy.

DOLLAR SUPPORT

The dollar's stronger tone was seen likely to last for a while as investors see growing signs of economic deterioration in other regions while the U.S. economic slowdown may be moderating.

Market expectations were growing for central banks in Australia and Britain to cut interest rates in coming monthsm while the Federal Reserve keeps U.S. rates on hold for a while.

The Aussie <AUD=> and New Zealand <NZD=> dollars, which have seen heavy losses in the last two weeks, benefited from higher commodity prices because their economies are big exporters of raw materials.

High yielding currencies like the Aussie and kiwi dollars also tend to benefit from higher risk appetite. The UBS risk index fell due to lower cross market volatility pointing to increased risk appetite. (Reporting by Simon Falush; Editing by Ruth Pitchford)