FOREX-Euro at 1-month high vs dlr, stg; Ifo fans ECB hike talk

(Changes byline, adds comment, updates prices)

By Toni Vorobyova

LONDON May 21 (Reuters) - The euro hit one month highs versus the dollar and sterling on Wednesday after a surprise improvement in German business sentiment added to talk that the next move in euro zone interest rates may be up rather than down.

The speculation started on Tuesday after ZEW president Wolfgang Franz said he expects the European Central Bank to tighten policy soon from the current 4 percent.

His comments were supported by higher than expected German producer price inflation and on Wednesday a surprise rise in the Ifo business sentiment index.

"The Ifo showed that the ECB is still in a position to make a move (up in rates) if it needs to do so," said Simon Derrick, head of currency research at Bank of New York Mellon.

"That's what people are looking for -- a central bank that is concerned more about inflation than anything else and has the flexibility to be able to deal with it should the need arise. And on both those counts the euro wins."

The euro rose as high as $1.5767 EUR= and 80.17 pence EURGBP= -- levels not seen since April 24. It also hit a three-week high at 163.15 yen EURJPY=.

The Ifo economic institute's business climate index came in at 103.5 in May, far exceeding forecasts for a dip to 102.0.

The euro's rally -- as well as a rise in oil prices to fresh record highs [O/R] -- dragged the dollar down to a one-month low against a basket of six major currencies, at 72.040 .DXY.

FED FOCUS

In contrast to burgeoning speculation of an ECB rate hike, bets on a Federal Reserve tightening before the end of the year have faded over the last few days, in part thanks to comments from vice chairman Donald Kohn on Tuesday.

Kohn said U.S. rates seem to be at the right level for now, but there was much uncertainty about the future outlook.

"His rhetoric dovetails with our view that the Fed is likely not committed at all to any specific course for interest rate policy in coming months," Saxo Bank said in a research note.

"This and the lower than expected (headline U.S.) PPI release yesterday were dollar bearish as more hawkish expectations have been creeping into the forward expectations."

Investors will also take a careful look at the minutes of the Fed's policy meeting on April 29-30 due at 1800 GMT.

The Fed has slashed rates by 3.25 percentage points to 2 percent since last September as a crisis in the housing and credit markets slowed the economy. Many now think the easing cycle is over, even if rate hikes are not yet on the cards.