FOREX-Euro hits 3-week high vs dollar after German, French GDP
* German, French GDP help euro zone data beat forecasts
* Dollar weak ahead of University of Michigan reading
* Australian dollar lifted by China CPI
LONDON, Feb 14 (Reuters) - Better-than-forecast euro zone growth numbers helped push the euro to its highest level in almost three weeks versus the dollar on Friday as investors bet European Central Bank action to avert deflation next month was less likely.
The single currency rose as high as $1.3715 after slightly stronger-than-expected growth in Germany and France pushed euro zone fourth-quarter GDP up 0.3 percent, above a forecast of 0.2 percent.
The dollar was weak after softer-than-forecast U.S. data on Thursday.
The euro zone data is likely to help reduce expectations that the ECB will cut interest rates at next month's meeting, after President Mario Draghi last week declared more information was needed before deciding on any action.
This week ECB Executive Board member Benoit Coeure said the idea of cutting the rate the ECB pays banks to hold their deposits overnight into negative territory was "a very possible option".
"When you see better growth data the market quite simply thinks there's less chance of deflation and less chance of Draghi taking action, which is currency-supportive," said Jane Foley, senior currency strategist at Rabobank.
She said she expects no action from the ECB next month as it will take Draghi "a few months at least" to assess the inflation data.
"The euro should remain well supported. If we get another couple of weeks of really bad U.S. data, that could promote the idea that the Fed (halts tapering its bond-buying stimulus), and the euro could be up there (at $1.37-1.40)."
The euro was flirting with the $1.37 level, the top of the daily Ichimoku cloud, a technical measure that is significant for chartists as a close above that level could be seen as sending the euro higher.
Dag Muller, technical analyst at SEB in Stockholm, pointed to key levels for the euro at $1.3740 and $1.3562.
"It ($1.3740) is a point where those who want to trade euro-dollar on the short side will give up," he said. "But if it breaks Wednesday's low of $1.3562 then euro-dollar bears will start to smile again."
The euro was also helped as the spread between U.S. 2-year Treasuries and 2-year German bunds narrowed.
Yields were weighed down by U.S. retail sales, which fell unexpectedly in January, while more Americans filed for jobless benefits last week, the latest signs the world's biggest economy started the year on a softer footing as bad weather took its toll.
The dollar index slid to a low of 80.065, its lowest since the start of the year, and was last at 80.094, down 0.3 percent, ahead of the University of Michigan's sentiment reading later on Friday.
The dollar was down 0.3 percent against the yen at 101.82 yen.
The greenback's weakness comes despite new Federal Reserve chairman Janet Yellen's testimony this week that the central bank was on track to keep reducing its stimulus even though the labour market recovery was far from complete.
"The recent string of worse-than-expected indicators from the U.S. are calling into question the recovery scenario there," said Marshall Gittler, head of global FX strategy at IronFX Global.
The Australian dollar was in focus after it dropped one full U.S. cent on Thursday in the wake of surprisingly weak labour data.
However, it continued to rebound on Friday, rising 0.6 percent to $0.9030, helped by data from China that showed consumer prices rose 2.5 percent in January, broadly in line with expectations.
China is Australia's main export market and the Aussie dollar is often used as a liquid proxy for investor bets on the Chinese economy.