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FOREX-Euro bounces off six-week low on rate outlook

Published 05/12/2011, 03:22 PM
Updated 05/12/2011, 03:28 PM

* Euro bounces but remains vulnerable to Greece worries

* U.S. data sends mixed signals, investors cautious

* ECB's Coene: April rate hike not a one-off (Updates prices, adds details, quotes, byline)

By Wanfeng Zhou

NEW YORK, May 12 (Reuters) - The euro edged higher from a six-week low against the U.S. dollar on Thursday as investors shrugged off worries about Greece and refocused attention on higher interest rates in the euro zone.

The European Central Bank's April interest rate rise was "certainly not" a one-off as inflation risks in the euro zone have increased and price pressures are building, ECB policymaker Luc Coene said on Thursday. [ID:nLDE74B0PZ]

Expectations of rising rates in the euro zone even as the Federal Reserve remains committed to keeping borrowing costs near zero have pushed the euro up near $1.50. But the currency has pulled back lately after the European Central Bank dented hopes of a rate hike next month.

"Certainly the market is fixated on interest rate expectations and talk of a potential interest rate hike could give the euro a boost," said Gareth Sylvester, senior currency strategist at San Francisco-based Klarity FX.

The ECB raised interest rates by 25 basis points to 1.25 percent in April to address firming price pressures, ending two years of crisis-induced loose policy. Financial markets expect two more such rises this year.

The euro was last up 0.3 percent at $1.4239

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Traders noted euro buying from sovereign accounts in the $1.41 area. Offers are now seen around $1.4280.

Analysts said the single currency was likely to remain under pressure from euro zone periphery woes. Speculation over whether Greece will receive more bailout funding kept risk appetite volatile as investors continued to price in a high probability that the country will eventually need to restructure its debt.

"If uncertainty is lifted behind what's going on with Greece, people will likely refocus attention on inflation, the ECB's potential for rate normalization and the Fed's likely status quo of remaining on the sidelines for at least the next six months to a year," said Mark McCormick, currency strategist at Brown Brothers Harriman in New York.

The euro earlier fell to 114.16 yen, its lowest since March 24

Part of the euro's turnaround came after U.S. economic reports sent mixed signals.

The U.S. economy struggled to gain momentum early in the second quarter, with retail sales posting their smallest rise in nine months in April and wholesale prices increasing more than expected. [ID:nN12296928]

Other data on Thursday showed new claims for unemployment benefits fell 44,000 last week to 434,000, but they remained too high to signal a strong labor market recovery.

The dollar index, which measures the greenback against a basket of currencies, <.DXY> rose as high as 75.645, its strongest in more than three weeks, taking it well above a three-year low touched only last week, before surrendering gains to trade at 75.174, down 0.2 percent.

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Against the yen, the dollar slipped 0.2 percent to 80.89

Among commodity-linked currencies, the Australian dollar

The Australian dollar and other commodity currencies did not react to China's move to increase reserve requirement ratios, although analysts warned this could add to the risk-off attitude in markets. [ID:nL3E7GC287] (Additional reporting by Nick Olivari; Editing by Chizu Nomiyama )

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