Dollar, Chinese shares steady as Europe wobbles

By Patrick Graham

LONDON (Reuters) - The dollar inched higher on Friday, putting it on track for a monthly rise in May, while Chinese shares steadied after a plunge a day earlier that stoked concerns about the financial health of the world's second largest economy.

European stock markets were down by up to half a percent, with dealers pointing to doubts over Greece's ability to make good on a promise to reach a cash-for-reforms deal with its euro zone partners by Sunday.

U.S. markets were also set to open a touch lower <1YMc1> , with a second estimate of first quarter economic output expected to show the economy contracted by 0.8 percent rather than growing 0.2 percent.

That darkening of the economic picture has been at the heart of the dollar's roughest patch since the start of a rally last year that has changed the playing field for business and financial investors worldwide.

The U.S. currency fell as much as 9 percent against the euro between April 13 and May 15 but has recovered more than half of that loss in the past week after Federal Reserve chief Janet Yellen affirmed her willingness to raise interest rates this year.

"The dollar remains a buy, even if it is not so wise to buy it against the euro," analysts from French bank Societe Generale said in a note to clients.

"If we get some kind of Greek deal ... it will not get rid of long-term concerns, but it would trigger a bounce in the euro. So we would rather be long of the dollar against the yen, pound and Aussie and Canadian dollars."

On Friday, the dollar rose 0.05 percent on the day against a basket of currencies and dipped 0.2 percent against the euro to $1.0972 .

Earlier, Asian shares had risen as China's markets <.SSEC> edged back from the previous day's 7 percent plunge, though regional investors were fearful that the world's best performing equity market was at the beginning of a major correction.

Investors dumped stocks on Thursday after more brokers tightened margin trading requirements and the central bank drained money to reduce flush liquidity in the financial system. The index is still up 43 percent so far this year.

"The correction is not yet over," said David Dai, Shanghai-based investment director at Nanhai Fund Management Co Ltd.

"Yesterday's slump was too rapid, so many investors didn't have time to flee. Many are still seeking an exit. The market has risen too much, and too fast, so the confluence of bad news is causing panic selling."

Prices of German government bonds, a safe haven for money looking for refuge from the Greek worries, rose after an advance extract of a newspaper interview quoted IMF chief Christine Lagarde as saying a Greek exit from the euro was a possibility.

The Frankfurter Allgemeine Zeitung changed the quote in versions of the interview run in print and online editions on Friday to read: "Nobody would wish a Grexit on the Europeans."

The paper said the IMF approved the interview in its first version, but did not explain why it changed the 'Greek exit' quote in later versions. Messages from senior European officials on Friday morning was also mixed. [GR-M]

"Quite a lot of discord over Greece has materialised overnight, with there generally being huge scepticism over a deal being done this weekend," said Mizuho strategist Peter Chatwell.

(Additional reporting by Pete Sweeney in Shanghai; editing by John Stonestreet)