FOREX-Dollar gains on repatriations, solid GDP reading

NEW YORK, July 27 (Reuters) - The U.S. dollar rebounded sharply on Friday, after a fall in the previous session, as trouble in the U.S. credit markets led investors to repatriate funds from overseas.

Worries about ongoing problems in the U.S. subprime mortgage and corporate bond markets have led investors to to shun bets in riskier assets such as foreign stocks this week, helping buoy the dollar as money flows back into the United States.

Meanwhile the flight from risk has led some traders to cut their exposure to carry trades, or purchases of high yielding currencies such as the New Zealand dollar, financed by selling low-interest rate currencies like the yen or Swiss franc.

"The focus of the market is still taking risky trades off the table," said David Powell, senior currency strategist at Ideaglobal in New York. "Overall, it's not really a dollar story, but it's about rallying low-yielders and falling high-yielders."

The U.S. dollar held on to its overnight gains after a preliminary estimate from the government showed the U.S. economy in the second quarter grew at its fastest pace since the first three months of last year.

Mid afternoon in New York, the euro was down 0.7 percent against the dollar at $1.3645, around two cents below a record high hit earlier in the week

he dollar was on track to post its highest weekly gain against the euro since early January this year.

Against the yen , the dollar rose 0.3 percent to 118.75. Earlier, the dollar fell as low as 118.02 , according to electronic trading platform EBS, its lowest in around three months.

On the week though, the yen was still up about 2.4 percent against the dollar and on pace for its largest gain in about four months.

The New Zealand dollar dropped 1.8 percent to US$0.7670 , while the Australian dollar sank 1.7 percent to US$0.8545 .

Some analysts said the U.S. dollar's rebound was likely to soon loose steam, particularly given concerns that weakness in the U.S. housing market will spill over into the broader economy, slowing growth.

"While the USD rebound could have a bit farther to run, particularly against some of the higher-yielding currencies, we think its strength will be limited over the medium term by a return of focus to an economy at risk," analysts at Scotia Capital wrote in a note to clients.

The futures market is indicating an 82 percent chance the Fed will ease monetary policy by year-end , up from 76 percent overnight. Before Thursday's rally, prospects for a Fed cut this year were below 50 percent.

(Additional reporting by Gertrude Chavez-Dreyfuss)