FOREX-Dollar hits 5-week high vs euro as sentiment improves

(Recasts first paragraph, adds comment, U.S. data, updates prices; changes dateline from LONDON and adds byline)

By Gertrude Chavez-Dreyfuss

NEW YORK, May 1 (Reuters) - The dollar hit a five-week high against the euro on Thursday as U.S. inflation data showed rising price pressures in the economy, which suggested that the pace of the Federal Reserve's monetary easing could slow.

Investors ignored higher-than-expected U.S. initial jobless claims, which did not bode well for Friday's non-farm payrolls report, and instead focused on the positive aspects of the U.S. spending and core inflation data.

The core PCE price index, the Fed's preferred gauge of inflation, was higher than market expectations, while U.S. personal spending rose by twice as much as forecast despite a cooling economy. That data blunted the sting of the U.S. jobless claims number and backed a growing view that the U.S. economy was in far better shape than most people had thought.

"We had higher personal spending and core PCE was a touch higher than expected and markets totally disregarded the jobless claims number," said Steven Butler, director of foreign exchange trading at Scotia Capital in Toronto.

"In this market, people just want to buy dollars," he added.

In early New York trading, the euro EUR= fell to a five-week low against the dollar to $1.5467, but traded back up to $1.5492, still down 0.8 percent on the day. Traders also said markets ran stop-losses in euro/dollar below $1.5490, accelerating the euro's decline.

Markets also shifted their focus from the Fed's failure to signal a definitive end to rate cuts, to worries about the health of the euro-zone economy.

The Fed cut rates by 25 basis points to 2 percent on Wednesday, as most expected, and signaled that its next move would depend on developments in financial markets and the economy.

The statement disappointed some investors who had expected a clear sign that the Fed was done with monetary easing after dishing out 325 basis points of cuts over eight months.

The dollar sell-off reversed in early European trade with traders saying moves were exaggerated by thin liquidity due to national holidays across much of the continent.

A run of weak sentiment data from the euro zone and its member states have fanned expectations that the European Central Bank may soon tone down its hawkish rhetoric and set off on a gradual path towards signaling eventual monetary easing.

The euro was down 0.9 percent at 160.80 yen EURJPY=, while the dollar was down slightly at 103.80 yen JPY=.

But given the Fed's focus on upcoming data, the dollar's rally may be cut short if key economic releases in the next few days come in below forecast. (Editing by Tom Hals)