FOREX-Dollar steadies as oil eases,near 1-mth low vs euro

By Chikako Mogi

TOKYO, May 23 (Reuters) - The dollar steadied on Friday as oil prices eased on profit-taking after hitting fresh record highs, but the currency stayed in sight of a one-month low against the euro on worries that inflation could lead to a deeper U.S. slowdown.

The dollar tends to move in the opposite direction to oil, and it took a hit on Thursday as oil jumped above $135 CLc1 for the first time, fuelling concerns about the U.S. economy just as the Federal Reserve is expected to halt its run of interest rate cuts to bolster the country's growth.

The euro held its ground, partly because recent solid data from the euro zone's largest economy, Germany, nurtured speculation that the European Central Bank was more likely to raise rates than cut after keeping them at 4 percent this week.

The yen came under pressure as rising energy prices would also hurt Japan's growth, which is showing signs of softening.

"The dollar is getting support as oil prices take a breather, but it remains vulnerable given concerns about inflation dragging down growth," said a senior dealer at a European bank.

"There is no reason to buy the yen either, leaving the euro with the most upside. But currencies are likely to stay in ranges as the market lacks convincing factors to set a clear direction," he said.

The euro was little changed from late U.S. trade at $1.5731 EUR=, after rising to a one-month high above $1.5800 on Thursday.

Solid stock markets may spur risk-taking and prompt investors into carry trades, where they use low-yielding currencies such as the yen to buy higher-yielding assets and currencies, undermining the yen, traders said.

The dollar was up nearly 0.1 percent at 104.14 yen JPY=, after slipping below 103 yen the previous day. Traders said the dollar was supported by buying from Japanese retail investors and importers but resistance was firm around 105 yen due to Japanese exporter selling.

The single currency was up 0.1 percent against the yen at 163.80 yen EURJPY=.

The Nikkei stock average .N225 was up 0.7 percent.

The rise in bond yields around the globe on inflation concerns also highlights how low Japanese interest rates are, further reducing incentives to buy yen, a dealer at a U.S. securities firm said.

The Bank of Japan kept interest rates steady at 0.5 percent earlier this week and is expected to hold them until global economic prospects become clearer. BOJ Governor Masaaki Shirakawa said the downside risks to the global ecnomy remained high.

U.S. crude CLc1 ended Thursday down $2.36 at $130.81 after soaring to a record high of $135.09.

Earlier this week, the Fed downgraded its 2008 U.S. economic growth forecast and raised its inflation outlook.

The Fed has cut interest rates to 2 percent from 5.25 percent since September, but markets now expect the central bank to hold steady and possibly raise rates by the end of the year.

Traders said they were waiting for a U.S. report on existing home sales due on Friday for clues on the dollar's direction. (Editing by Hugh Lawson)