FOREX-Euro rises above $1.58 as Fed, oil weigh on dollar

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

By Toni Vorobyova

LONDON, May 22 (Reuters) - The euro rose above $1.58 for the first time in a month on Thursday after a cut in Federal Reserve's 2008 growth forecast and crude oil's surge to fresh record highs stirred fears about the health of the U.S. economy.

In its April meeting minutes, the Fed also lifted its inflation forecast and suggested it had finished cutting rates after cutting them to 2 percent last month.

Oil jumped over the $135 a barrel mark CLc1, bringing its gains for the year to date to 40 percent and fuelling worries the United States is sliding into stagflation -- a vicious combination of rising inflation and tepid growth.

The dollar has taken a hit not only because it tends to fall when oil rises, but also because the U.S. is facing such a toxic mix of growth and price pressures at a time when the Fed has slashed interest rates to buttress the economy.

"We still keep our scenario of a weak U.S. dollar. The minutes of the FOMC overnight were not particularly positive...When you look at the policy mix between inflation and economic data, it is still negative for the dollar," said Carole Laulhere, currency strategist at Societe Generale in Paris.

"Oil prices are rallying every day and it weighs on the dollar, and the same for equity markets," she added.

The euro struck a one-month peak of $1.5814 EUR= according to Reuters data, its highest since April 24.

The euro was cheered by Wednesday's surprise improvement in German business sentiment, which stoked expectations the European Central Bank's next move is likely to be to raise interest rates from the current 4 percent rather than cut them.

Thanks to the ECB's focus on keeping price pressures under control, the surge in oil prices also reinforced the euro's status as a possible hedge against inflation.

The dollar edged up to 103.06 yen JPY=. The euro was also a little firmer at 162.89 yen EURJPY=, but off Wednesday's three-week high at 163.15.

JUMPING KIWI

The biggest mover among the majors was the New Zealand dollar, which jumped more than 1 percent to US$0.7895 NZD= thanks to a bigger than expected $8.2 billion cut in personal taxes in the 2008/9 budget [ID:nWEL285158].

"Markets may have overshot themselves in the pace of rate cuts anticipated so the budget is providing an opportunity to adjust views," UBS said in a research note.

"Also the budget expansion will involve issuing an additional NZ$900 million in debt against original expectations ... With high-yielding good quality sovereign debt highly sought after by international investors, such developments are positive for NZD."

Thursday's relatively light data calendar features euro zone March industrial orders at 0900 GMT, followed by weekly U.S. jobless claims and Canadian March retail sales at 1230 GMT.

"An upside surprise on March retail sales due today could solidify the impression that high commodity prices are helping Canada weather the global storm, buoying the CAD," JP Morgan said in a research note.

The U.S. dollar edged up to C$0.9846 CAD=, recovering from Wednesday's two-month low of C$0.9816.