NEW YORK, Jan 31: The dollar rallied against the euro and traded flat against the yen on Friday after government data showed a milder-than-expected US economic contraction.

The euro fetched $1.2800 from $1.2954 in late New York trading Thursday. The dollar was stable against the Japanese currency, trading at 89.95 yen against 89.97 on Thursday.

The greenback remained strong despite a 3.8 per cent contraction in US gross domestic product in the fourth quarter of 2008 — the lowest level since 1982.

The smaller drop in GDP drove the US dollar higher against every major currency except for the Japanese yen, said Kathy Lien, director of currency research at Global Forex Trading.

However the dollar rally may not last because GDP is a backward looking number, she said.

We could still see a larger contraction in growth during the first quarter, especially with the amount of layoffs that have been reported. Analysts say the dollar and yen are being driven by investor fear, with the two currencies seen as the safest in the current turmoil.—AFP