FOREX-ECB rate hikes bets propel euro higher

(Changes dateline, byline, updates prices, adds quotes)

By Toni Vorobyova

LONDON, June 9 (Reuters) - The euro hit a six-week high versus the dollar and a five-month peak against the yen on Monday, propelled higher by expectations of a European Central Bank rate hike next month.

Prospects of such a move were flagged up on Thursday when the ECB left policy on hold at 4 percent as forecast, but president Jean-Claude Trichet said it was on high alert over inflation and a number of policymakers supported raising rates.

Bets of a July hike were further heightened by hawkish comments from his colleagues the following day.

In contrast, the dollar's yield appeal took a bashing on Friday on news of the biggest jump in the U.S. unemployment rate in 22 years, to 5.5 percent in May, denting expectations the Federal Reserve will hike interest rates before the year is out.

Oil prices also weighed on the greenback, with crude holding within $2 of Friday's record highs [O/R].

"We have a strong euro, and a weak dollar, higher oil prices, a very sharp dip in the global risk appetite. The negative correlation between oil and the dollar is a key issue at the moment. (And) slowing rate hike expectations in the U.S. and strong expectations in the euro zone, that's also a key feature," said Niels Christensen, FX strategist at Nordea.

"I am very afraid of higher oil prices...and that will force the dollar down, and euro/dollar higher," he added.

The euro rose to a six week high of $1.5831 EUR= and set a five-month peak versus the ultra-low yielding Japanese currency at 166.49 according to Reuters data EURJY=.

The euro also rose to 80.25 pence EURGBP=, as expectations of euro zone rate hikes contrasted for bets for continued monetary easing from the Bank of England.

A Reuters poll taken after Thursday's Trichet comments showed a median 47 percent chance of a July rate hike to 4.25 percent [ECB/INT], compared to the majority expecting that the next ECB move would be a cut in a poll taken a week earlier.

However economists remained more cautious on ECB rate expectations than markets.

"With markets now pricing in 75 bps of ECB hikes by year end however, we think there is a reasonable chance ECB officials will attempt to calm such speculation," Commerzbank Corporates & Markets said in a research note.

FED RESPONSE?

Further clues on the depth of the U.S. economic slowdown will come with April pending home sales figures at 1400 GMT.

The calendar also features speeches from ECB Governing Council member Guy Quaden as well as several Fed officials, including chairman Ben Bernanke at 2200 GMT.

Last week Bernanke surprised markets with a rare warning on currencies, saying the Fed was paying attention to the moves in the dollar and the implications for inflation.

"The question this week is whether a new leg weaker in the dollar would spark the Fed to speak out again, especially if it coincides with renewed evidence of economic weakness," ING said in a note to clients.