FOREX-Euro falls sharply on ECB; caution boosts dollar

Thu May 5, 2011 12:32pm EDT

* Euro at day's low below $1.46; ECB signals no June hike

* Euro stages biggest daily slide vs dollar since November

* Weaker U.S. growth feeds aversion to risk

* Yen rises to highest level since March intervention

* Low U.S. rates, fiscal woes still dollar negatives (Updates prices, adds comment, detail)

By Steven C. Johnson

NEW YORK, May 5 (Reuters) - The euro headed for its biggest slide against the dollar since November on Thursday after the European Central Bank hinted interest rates were unlikely to rise next month, short-circuiting a rally that had driven the currency to a 17-month high.

The signal by ECB President Jean-Claude Trichet on rates added to a growing sense of risk aversion in markets, sparked by signs of slower growth in the United States and some other developed economies, and spurred traders to bail out of high-yielding currencies and commodities.

The dollar and yen were the main beneficiaries, as record low interest rates made it profitable to borrow in those two currencies at no cost to finance more lucrative investments.

The euro fell as low as $1.4581 EUR= before easing to $1.4604. It was still well off Wednesday's 17-month high of $1.4939 and was headed for its worst day since last November.

A sharp fall in the price of oil this week has taken the edge off inflation concerns, muting expectations for higher interest rates as the high energy cost weighs on consumers.

The price of U.S. crude oil has lost some 9 percent since hitting $114 CLc1 on Monday, its highest level since 2008.

"The story across the board is the Western consumer is being hit by high energy costs, irrespective of whether his currency is weak or strong," said Boris Schlossberg, head of research at GFT Forex.

An eight-month high in initial U.S. jobless claims reported on Thursday and weak U.S. service data suggest as much, as do weaker retail and industrial reports in Australia and Germany, he said.

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The euro also fell against the yen, down 2 percent to 117.05 yen EURJPY=, while the dollar fell below 80 yen for the first time since March 18, the day major central banks intervened to weaken the Japanese currency after it hit a record high. JPY=

The strengthening of the yen prompted some traders to warn that a second round of intervention could be on the cards. Japan's finance minister said authorities were monitoring the market but added the yen move appears different from the one that triggered the March intervention. [ID:nP9E7ET00K]

U.S. government bonds rose and the dollar gained 1.2 percent against six major currencies after plumbing a three-year low on Wednesday. .DXY

TRICHET TREADS LIGHTLY

High energy prices have stoked inflation in Europe and other economies and prompted the ECB to hike rates in April for the first time since 2008. That helped boost the euro, up 9 percent against the dollar this year.

But Trichet on Thursday suggested rates were unlikely to rise next month as some investors had expected, though he left the door open to a hike in July.[ID:nLDE7440GG]

Some said the moves on Thursday were overdone. Recent weak U.S. economic data "merely validates our structural view on U.S. growth: supertanker-slow but persistent progress," said Dan Dorrow, head of research at Faros Trading. "Markets expect more acceleration, but the U.S. will lag others for a long time," which should dampen demand for dollars.

Indeed, analysts still expect the ECB to raise rates more rapidly than the Federal Reserve, which is seen holding U.S. borrowing costs at record lows until at least mid-2012. Persistent worries about a yawning U.S. budget deficit should also make it hard for the dollar to stage an extended rally.

"The euro is in an uptrend and I see no particular reason to be turning negative here," said Adrian Schmidt, currency strategist at Lloyds Banking Group.

But Schlossberg said a continued slide in oil prices could alter the outlook.

"Trichet's overall tone is still pretty hawkish and there's little doubt they've abandoned their tightening policy, and that favors the euro in the medium term," he said. "But they have paused, and if oil falls and stays below $100 a barrel, that might relieve some of the price pressures they face."

The slide in commodities hurt currencies from commodity exporters such as the Canadian and Australian dollars. The latter fell to $1.0650 AUD=D4 after rising above $1.10 earlier this week, its highest level in nearly 30 years. (Additional reporting by Nick Olivari in New York and Jessica Mortimer in London; Editing by Leslie Adler)

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