FOREX-Euro slips on weak German data, oil boosts dollar

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By Naomi Tajitsu

LONDON May 30 (Reuters) - The euro slipped on Friday, relinquishing early gains to hit a two-week low against the dollar after surprisingly weak German retail sales figures added to the view that the euro zone economy may be weakening.

German retail sales unexpectedly fell for the second month in a row in April, suggesting cracks in the region's economy which until now had been resilient to a global slowdown even as inflationary pressures increase.

The dollar was also boosted after a jump in U.S. bond yields and a drop in oil prices also helped trigger short-covering in the currency, which has rebounded broadly this week as U.S. data helped ease concerns about the U.S. economy's outlook.

"The euro fell on weaker German retail sales figures, and the collapse in oil prices is also having a follow-through impact on euro/dollar," said Kenneth Broux, market economist at Lloyds TSB Financial Markets

But he added that euro zone inflation figures due later in the day were likely to show ongoing price pressures, which may intensify views that the ECB will not drag its feet in raising rates from the current 4 percent despite a slowdown in growth.

Euro zone inflation figures due at 0900 GMT are expected to show an annualised reading of 3.5 percent in May, up from 3.3 percent in April due to rocketing food and oil prices [nL2380371].

Such a figure would be just below a record high of 3.6 percent in March.

ECB President Jean-Claude Trichet in an interview published on Friday said that the central bank will do everything it can to preserve price stability and reassert expectations of low inflation, maintaining his bias towards higher rates [nL3020162].

The euro slipped 0.2 percent to $1.5480 EUR=, near a low of $1.5463 hit early in London trade for the first time since mid-month. The dollar was little changed at 105.45 yen JPY= hovering near a three-month high of 105.87 hit in Thursday.

Helping to support the dollar was a roughly 1 percent fall in U.S. crude prices to $125.43 per barrel CLc1 as oil reeled back from a record high of $135.09 hit last week.

Moves in oil prices are seen as key for the dollar, as recent surge has fanned fears about the ability of U.S. consumers and businesses to weather the credit- and housing market-led downturn.

The dollar has tended to fall when oil prices surge due to speculation that oil-producing countries may use the increased dollar-denominated windfall from crude exports to buy euros and other currencies to diversify their portfolios.

The dollar was also supported after U.S. gross domestic product grew at a 0.9 percent annual rate in the first quarter, in an upward revision from the 0.6 percent rate estimated a month ago, data showed on Thursday. [ID:nN29454340]

Two-year U.S. Treasury yields US2YT=RR surged to 2.791 percent on Thursday, their highest since early January, after Dallas Fed President Richard Fisher said on Wednesday it would be "unacceptable" for the Fed to be viewed as accepting higher levels of inflation.

Investors awaited the core PCE price index for April, the Fed's favourite inflation gauge, for clues about price growth. The U.S. personal income/spending data is due at 1230 GMT.

(Editing by Ian Jones)