FOREX-Euro extends gains after Trichet's rate hike signal

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By Simon Falush

LONDON, June 6 (Reuters) - The euro hit a five month high versus the yen on Friday, and added to hefty gains against the dollar after European Central Bank President Jean-Claude Trichet said a rate hike was possible as soon as next month.

Trichet shocked investors on Thursday by saying a number of policymakers wanted higher interest rates and gave a clear indication that rates may rise by a quarter-point in July, sending the euro soaring more than 1 percent against the dollar.

"The story in the last 24 hours has been about the euro doing well, with the yield outlook making the euro look more attractive," said Chris Turner, head of FX strategy at ING.

The Trichet comments doused this week's dollar rally, which gathered pace after Federal Reserve Chairman Ben Bernanke commented about the impact of dollar weakness on inflation [ID:nN04299230].

Analysts said the greenback could come under renewed pressure if U.S. non-farm payrolls figures at 1230 GMT come out weaker than expected.

"If the payrolls come in weak the broader dollar recovery could come to an end, and our forecast is for a below forecast number," ING's Turner said.

By 0749 GMT, the euro was up 0.1 percent at $1.5601 EUR= just off a high of $1.5617, a sharp rebound from Thursday's three-week low of $1.5365.

The single currency climbed 0.3 percent to a five-month high of 165.70 yen EURJPY=R, according to Reuters data, as solid gains in regional stocks spurred carry trades where investors sell the yen in favour of higher yielding assets.

INFLATION FIGHTING

This week's array of inflation-fighting comments from top central bankers showed heightened concern about containing the flare-up of price pressures from soaring oil and food prices, driving government bond yields higher around the world. Japan's five-year bond yield struck a 10-month peak on Friday. [JP/]

"Bernanke's comments earlier in the week with respect to the dollar, suggests that broad valuations on the dollar may be used as a barometer on whether monetary policy has become too accommodative," said UBS in a note to clients.

"In the context of Trichet's comments yesterday, monetary conditions in the G3 are unlikely to become more accommodative in the near-term."

The yen slid broadly on Thursday after data showing surprisingly strong U.S. retail sales in May sparked a jump in Wall Street stocks.

The dollar rose 0.15 percent to 106.06 yen JPY=, pushing back towards a three-month peak of 106.44 yen hit on Thursday.

The Australian dollar gained 0.25 percent to 101.62 yen AUDJPY=R.

The Aussie has gained on expectations the Reserve Bank of Australia will keep rates on hold at 7.25 percent and could raise them more as the economy remains resilient to the U.S. slowdown and inflation is running above the central bank's target. (Reporting by Simon Falush; Editing by Malcolm Whittaker)