FOREX-Dollar struggles on North Korea nuclear tests; euro shines

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* Euro up half a percent before ECB meeting this week

* Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh

By Saikat Chatterjee

LONDON, Sept 4 (Reuters) - The dollar struggled on Monday with a trade-weighted basket approaching a 2-1/2 year low as North Korea's latest nuclear tests prompted a rush to unwind bets with the euro the only notable exception to the broad market sell-off.

Both the Japanese yen JPY= and the Swiss franc CHF= notched up chunky gains against the dollar after news on Sunday of North Korea's sixth and most powerful nuclear test, prompting the United States to warn of a "massive" military response if it or its allies were threatened. urn:newsml:reuters.com:*:nL4N1LL01U

"The reaction in the markets is a classic risk-off reaction to the geopolitical events but a notable exception is the continued euro strength," said Neil Jones, head of hedge fund sales at Mizuho Bank Ltd in London.

The euro EUR=EBS rose half a percent against the dollar at $1.19 and not far away from a 2-1/2 year high above $1.20 hit last Tuesday. It is up more than 13 percent against the dollar this year and is the best performing currency in the G10 space.

The euro's price action on Monday was all the more surprising given the overhang of long bets on the single currency that have grown rapidly this year and before an ECB policy meeting this week. urn:newsml:reuters.com:*:nL2N1LI1UT and urn:newsml:reuters.com:*:nL4N1LH4O1

Latest positioning data showed long euro positions at their biggest in five years.

That rise has come at a time when expectations of the ECB announcing a timeline for a withdrawal of its bond purchase plans have reduced sharply to less than a fifth from over half of the total number of analysts in Reuters polls in three weeks.

Morgan Stanley strategists do not expect any pushback from ECB policymakers on the euro's strength as the currency has been rising on the back of strengthening economic fundamentals.

Moreover, the ECB has a noticeable bias of talking about the currency when it is on a weaker trajectory, according to data-mining of all the ECB policy statements and press conferences since 1998. In its last statement in July, the currency had a low number of mentions of 9 times, they said.

However, price action was subsiding after the morning flurry as Wall Street traders do not return from the Labor Day holiday until Tuesday in a week filled with central bank meetings that are expected to dominate market attention.

Apart from the European Central Bank, both Australia and Canada's central banks also have policy meetings.

The broader dollar index .DXY was down 0.2 percent at 92.65 and not far away from a 2-1/2-year low below 92 last week.

"Rising geopolitical tensions have pulled the dollar below the 110 yen levels and though we are surprised by how events have unfolded in the last 48 hours, markets are unlikely to react much to this unless this escalates into a conflict," said Commerzbank foreign exchange strategist Thu Lan Nguyen.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

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(Reporting by Saikat Chatterjee, editing by Ed Osmond) ((saikat.chatterjee@thomsonreuters.com; +44-20-7542-1713; Reuters Messaging: saikat.chatterjee.reuters.com@reuters.net))

Keywords: GLOBAL FOREX/

Referenced Symbols:EFX,

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