* Dollar consolidates after hitting 14-year highs vs euro
* Yen up 0.2 pct after hitting weakest levels since Feb
* Market should thin into year-end, bias still favours
* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh
By Patrick Graham
LONDON, Dec 16 The euro, yen and pound all
recovered some ground against the dollar on Friday after slides
of up to 3 percent in reaction to the Federal Reserve outlook
for U.S. interest rates next year.
Markets had headed into the Fed meeting on Wednesday
expecting litte chances of another surge in the dollar before
the end of the year.
But instead, the upping of predictions for the number of
interest rate rises next year brought parity with the euro back
into play and took losses for the yen from its peak on U.S.
election night in November to just over 17 percent.
Both were trading 0.2-0.3 percent higher on the day on
Friday at $1.0438 and 118.37 yen per dollar,
"It's Friday and we have had a busy week. I would be
surprised to see the euro pushed below $1.04 today," said Niels
Christensen, a strategist with Nordea in Copenhagen. "I still
think the risk is to the downside. But from here we move into
year end. The market will be less liquid."
Many banks' forecasts for the major developed currencies
have been blown out of the water by the moves of the past 36
hours. Only 10 of more than 50 polled by Reuters earlier this
month forecast the dollar reaching parity with the euro within
the next 12 months. On Thursday that threshold was just over 3
But given the scale of the moves in the past month, driven
on by volatility around last week's European Central Bank
meeting and the Italian constitutional referendum, many players
may now be content to walk away until January.
One risk to that scenario is a squeeze on dollar liquidity
around the year-end. The one-year cost of dollar funding for
European banks - called cross currency basis swaps - is back
within sight of 4-year highs hit at the end of November.
"I'm going to be watching the year-end very closely," said
the head of trading at one large international bank in London.
"If it gets much worse it may create more of the sort of
pressure we saw on the dollar earlier this year."
Nordea's Christensen also pointed to the risk, highlighted
by October's 10-percent "flash crash" in sterling, that a large
order could move prices sharply as trading volumes fall over the
The dollar was up another 0.2 percent against both its New
Zealand and Australian equivalents and the Chinese
With a weaker renminbi one of the big calls of many
international banks for the next year, all eyes are on how much
more weakness Beijing will tolerate, a year after a speculative
run on the offshore version of the currency.
(Editing by Jeremy Gaunt)