By Tamawa Desai LONDON (Reuters) - The euro fell broadly on Friday, as traders locked in profits from the currency's rally to a 2 1/2-month high against the dollar and its strongest level ever against sterling this week. The dollar fell closer to a 13-year low against the yen, reversing brief gains made after the Bank of Japan cut interest rates, as a dismal U.S. economic outlook continued to sting the currency. The euro fell below $1.40 for the first time since Wednesday, as traders reckoned that its broad surge this week may have been overdone. The single currency is on track to post a weekly gain of roughly 5 percent against the dollar, one of its biggest since the euro was launched in 1999. "There have been year-end related flows in the past couple of weeks (pushing up the euro) and such flows seem to be subsiding a bit," said Ian Stannard, strategist at BNP Paribas. That prompted traders to take profits as they were adverse to holding risk in illiquid year-end market conditions. By 6:50 a.m. EST, the euro was down almost 2.0 percent at $1.4009 after hitting a low of $1.3987, according to Reuters data, dropping more than 3 cents from a session high. "We've seen a lot of volatility in the market in the past few days so people are in some sense keeping risk light and taking positions which are shorter-term," said Phyllis Papadavid, currency strategist at Societe Generale in London. The single currency has retreated from $1.4720 touched on electronic trading platform EBS on Thursday, its strongest since late September. Some in the market said that euro losses were also part of a delayed reaction to the European Central Bank's move on Thursday to cut the return it gives banks for holding cash at the ECB and prod interbank money markets back to normality. The single currency also fell 2.5 percent to 124.40 yen, down from 131.03 yen hit on Thursday, its highest in nearly two months. Against sterling, it fell 1.7 percent to 93.24 pence, retreating from a record high of 95.56 pence hit according to Reuters data on Thursday. DOLLAR VULNERABLE The dollar fell 0.4 percent to 89.04 yen, sliding within range of 87.13 yen reached on electronic trading platform EBS earlier in the week, for the first time since mid-1995. The yen was broadly supported as ongoing concerns about the global economy prompted more investors to dump risky positions including carry trades, where the low-yielding Japanese currency in past years was used to buy assets in higher-yielding currencies. The BOJ's decision to cut rates to 0.1 percent on Friday had provided a brief boost to the dollar as the monetary easing took the policy target rates of Japan and the U.S. to more or less equal footing. But the dollar quickly reversed those gains as the BOJ's move to put more funds into the market to ease the credit crunch was seen as positive for Japan's economy, boosting the yen. In addition, the possibility of a delay by the U.S. government on whether to bail out the country's ailing automakers and a fall in oil prices to their lowest in more than four years kept the U.S. currency under selling pressure. Bridge loans to carry the companies for several months could be announced as early as Friday, according sources not authorized to publicly discuss negotiations on the issue. The possibility that the firms could fail could have a deep, negative impact on the wider economy stung the dollar, while a fall in oil prices to their lowest in more than four years also illustrated shrinking demand as a global recession takes hold. "The automakers' issue is a problem for the entire U.S. economy ... and the fall in oil prices is part of a global economic story because of demand issues, and that's dragging on the dollar," said James Hughes, markets analyst at CMC Markets in London. (Additional reporting by Naomi Tajitsul; Editing by Andy Bruce)

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