Euro gains as hopes for ECB rate cut fade

By Vivianne Rodrigues

NEW YORK (Reuters) - The dollar slid against the euro on Thursday as tough inflation comments by a European Central Bank official and strong German business confidence data dashed hopes for a near-term interest rate cut in the euro zone.

An improvement in investors' appetite for risk, following a sharp rebound in European stocks and gains in U.S. equities, pushed down the U.S. dollar versus high-yielding currencies such as the British pound and the Australian and Canadian dollars.

ECB governing council member Axel Weber said the Federal Reserve's surprise decision to cut its key overnight lending rate by 75 basis points to 3.50 percent on Tuesday had not shifted the ECB focus on euro zone inflation, dampening rising expectations that it too will have to cut rates soon.

"The ECB comments combined with the strong report in Germany, poured cold water on rate-cut expectations in Europe and boosted the euro," said Omer Esiner, a market analyst at Ruesch International in Washington D.C.

In late afternoon trading in New York, the euro rose 0.8 percent and traded at $1.4753, on track for a third day of gains. It rose 1 percent to 157.72 yen.

The dollar was up 0.1 percent at 106.90 yen, after earlier slipping to 105.95 yen. Against the Swiss franc, the dollar fell 0.4 percent to 1.0863.

"The fact that there seems to be a bit of calm in the equity markets has in some regard sent the forex market towards selling dollars," said John McCarthy, director of trading at ING Capital Markets in New York.

STRONG GERMAN DATA HELPS

The euro came under selling pressure in recent weeks as signs emerged that weakness in the U.S. economy was having a knock-on effect on the euro zone, fueling the argument for a rate cut by the ECB.

Some of those concerns eased slightly on Thursday after the Ifo economic research institute reported that German corporate sentiment unexpectedly rose in January, bolstering policy-makers' assertion that the euro zone economy can withstand turmoil in financial markets.

Euro zone rate futures, which were pricing in 75 basis points earlier this week, now price in about 40 basis points of easing this year. The ECB's benchmark rate is currently 4 percent.

The Australian dollar benefited from the improvement in risk appetite and a surge in the price of gold by 2 percent above $900 an ounce. The Australian dollar rose 0.7 percent to US$0.8811, while its New Zealand counterpart leapt 0.9 percent to U$0.7734.

There was little reaction to a report showing that the pace of existing-home sales in the United States fell 2.2 percent in December to a slower-than-expected 4.89 million-unit annual rate.

"Downside surprises have long lost some of their capacity to hurt risk appetite. The broader dollar tone will remain modestly negative, hurt in the main by reduced risk aversion inflows," said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.

(Additional reporting by Lucia Mutikani; Editing by Richard Satran)