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FOREX-Norwegian crown sinks on surprise rate cut

* Dollar edges up vs yen, pulls up from two-week low

* Euro up after ECB long-term loan operation (New throughout after morning moves in Europe)

By Patrick Graham

LONDON, Dec 11 (Reuters) – Norway’s crown currency sank by almost a full percentage point on Thursday after a slump in oil prices and demand provoked its central bank into an early and unexpected cut in interest rates, driving the crown to its weakest since mid-2009.

The euro recovered from early losses against the dollar but the yen was again on the retreat after three days of gains which have allowed many of those betting against it to take some profit and start again.

Trading in the crown was almost 9 times the monthly average in the half hour following Norges Bank’s decision to cut rates and advise markets there was the risk of further easing in the months ahead.

Encouraged by Governor Oeystein Olsen’s suggestion that the chances of another cut were 50-50, forward interest rates showed the market split down the middle on whether the bank would ease policy again in March.

“A cut was inevitable really but the timing was quite impressive,” said Josh O’Byrne, a currency strategist with Citigroup in London.

“Companies in the oil sector are cutting back on investment and that means employment situation will weaken. Even if oil prices rebound, investment is unlikely to recover very fast. So Norway’s non-oil economy needs to become more competitive.”

The crown has now fallen more than 10 percent against the euro since the start of October, Norway’s dependence on oil and gas making it one of the worst sufferers from a dramatic slump in crude prices globally.

“The thing that struck us was that the bank has paid no attention to the scale of the fall in the crown already, they are not afraid of it weakening further,” said a spot currency trader with one Scandinavian bank.

“Its all eyes on oil prices but until there is some more certainty that they are not going to cut again, it is going to be very difficult to buy the crown.”

The euro had slid around a quarter of a percent as the ECB said banks had taken just 129 billion euros in the second tranche of its targetted long-term loans, keeping pressure on the bank to ease policy more dramatically in the new year.

By 1140 GMT, it had recovered to trade up 0.1 percent on the day at $ 1.24555 as some investors took profits on short positions.

The dollar has pulled back from a seven-year peak of 121.86 yen set on Monday as crowded long-dollar trades were thinned out. It touched a two-week low near 117.45 yen earlier on Thursday but in early European deals was up 0.8 percent at 118.55 yen.

“Everybody knows the longer-term trend for the dollar is higher, there is just a big temptation for people to take profit before the end of the year, and volumes have begun to fall off already,” said one London-based dealer.

(Editing by Toby Chopra)

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