FOREX-Euro bounces back as rate cut hopes ease

(Changes byline, adds quotes, updates prices)

By Ian Chua

LONDON, Jan 24 (Reuters) - The euro strengthened against the dollar and yen on Thursday after tough talk on inflation from European Central Bank policymaker Axel Weber dampened expectations of a possible near-term interest rate cut.

The yen retreated on the back of the bounce in the euro and as European stocks extended their rally, after earlier gaining on lingering concerns over the health of the global economy.

"For the time being, the ECB are maintaining a very hawkish line so no signs of any rate cut any time soon," said Chris Turner, head of FX strategy at ING.

"You're then left with sharply lower U.S. rates, stable European rates and with equities doing quite well at the moment ... the market is just going to focus on the dollar bearish story."

Weber said the U.S. Federal Reserve's surprise decision to cut interest rates by 75 basis points this week hasn't shifted the ECB focus on euro zone inflation, dampening mounting expectations that it too will have to cut rates soon.

The euro climbed 0.3 percent to $1.4683 EUR= by 1206 GMT and was also up 0.3 percent versus the Japanese currency at 156.60 yen EURJPY=, well above an early low of 154.86 yen.

The dollar was steady against the Japanese currency at 106.65 yen JPY=, off early lows.

Higher-yielding currencies such as the New Zealand NZD= also benefited, gaining 0.6 percent to $0.7715 .

The euro had come under selling pressure in recent weeks as signs emerge that weakness in the U.S. economy is having a knock-on effect on the euro zone, fuelling the argument for a rate cut by the European Central Bank.

Some of those concerns also eased slightly after German corporate sentiment unexpectedly rose in January, bolstering policymakers' assertion that the euro zone economy can withstand turmoil in financial markets. [ID:nL24345341].

CHANGING LANDSCAPE

The turnaround in the euro helped reverse earlier demand for the low-yielding yen when investors remained worried about the U.S. economy despite Wall Street's positive performance overnight.

Optimism about a U.S. government plan to rescue ailing bond insurers, which could prevent investors from being forced to sell billions of dollars of bonds the insurers had covered, sparked a comeback in stocks, but was greeted initially with scepticism in the currency markets.

The FTSEurofirst 300 .FTEU3 index of top European shares jumped 5 percent. (Editing by Ron Askew)