By Deborah Levine & Myra P. Saefong, MarketWatch
NEW YORK (MarketWatch) -- The dollar remained near its highest level in three months on Friday, as hints of geopolitical troubles gave traders more reasons to reverse so-called short trades that bet the greenback will continue to fall.
Adding to concerns about fiscal stability in certain countries in recent weeks, media reports said Iranian forces took control of a southern Iraqi oil well in a disputed section of the border Friday.
Separately, the dollar notched some of the biggest gains among the major currencies versus the Japanese yen, after the Bank of Japan left its call-rate target and economic assessment unchanged and signaled an extended continuation of easy monetary policy.
The euro (CUR_EURUSD 1.43, 0.00, -0.26%) bought $1.4352, compared to $1.4340 in late New York trading on Thursday.
The dollar index (DXY 77.64, -0.05, -0.07%) , which tracks the greenback against a trade-weighted basket of six major counterparts, traded at 77.686 in recent activity, compared to 77.75 on Thursday, when it touched the highest since early September.
Traders also noted rather thin trading volume, citing illiquid markets and a lack of U.S. economic data.
The greenback strengthened this week owing to a rush to its perceived safety spurred by concerns about Greece's debt payments and a reassessment of when the Federal Reserve could begin to tighten U.S. monetary policy. See Thursday's Currencies column.
That followed concerns about Dubai's debt situation and concerns over the fiscal health of other European nations.
"The Iraq news adds to that compendium of developments that add to an elevated perception of caution," said David Watt, senior currency strategist at RBC Capital Markets. "Given that the U.S. dollar had looked oversold, the market had been looking for reasons to unwind the dollar shorts."
The euro also showed little reaction to the European Central Bank's twice annual financial stability review, which put the potential further write-downs on assets for the euro-area banking sector up to the end of 2010 at 187 billion euros ($269 billion).
This was balanced by the Ifo index measuring the German business climate, which increased more than anticipated this month. See more on Ifo survey.
Bank of Japan
The Bank of Japan unanimously voted to keep its overnight call-rate target at 0.1% and emphasized the need to pull Japan out of deflation. See full BOJ story.
"The statement was also read as "opening the door to employing any means to avoid it, including the so-called 'policy-duration effect' to promise that low interest rates will be kept for longer," Steven Englander, currency analyst at Barclays Capital, wrote in a note. "Such a stance, if followed by action, should push down the longer-term yields and have negative implications for the yen."
The dollar (CUR_USDYEN 90.68, +0.84, +0.94%) recently rose to buy 90.37 yen, compared with 89.90 yen late Thursday.
