* Euro zone inflation data seen confirming ECB rate hikes
* Euro firms broadly as interest rates expected to rise
* Mth-end demand helps euro, Irish stress test results due (Adds quotes, updates prices, changes byline, changes dateline previous LONDON)
By Julie Haviv
NEW YORK, March 31 The euro outperformed rival currencies on Thursday as inflation data firmed expectations the European Central Bank would raise interest rates, but the currency's strength may prove temporary with peripheral debt issues seen persisting in the second quarter.
Traders said significant quarter-end flows helped boost the euro at the expense of the dollar in particular.
Official euro zone estimates showed consumer prices jumped 2.6 percent year-on-year in March, up from 2.4 percent in February and above forecasts. For details, see [ID:nLDE72U14W]
Jens Nordvig, global head of FX strategy at Nomura Securities in New York. said an ECB rate hike at its next monetary policy meeting on April 7 was a "done deal."
Comments from ECB policymaker Lorenzo Bini Smaghi Wednesday implied the central bank's policy would gradually raise rates. Markets see the tightening cycle starting in April. [ID:LDE72T1ZS]
The euro gained nearly 6 percent against the dollar in the first quarter, partly on expectations the ECB would raise rates well before the U.S. Federal Reserve.
"The first quarter we saw a generally weak dollar environment, an ECB turning hawkish, and the risk premium being taken out of the euro," Nordvig said.
The euro briefly pared gains against the dollar after Reuters quoted sources as saying the ECB would not announce plans for a new liquidity facility to help Irish banks. The euro fell to $1.4176 EUR= from $1.4185 just before the report. The euro was still up 0.4 percent from the prior New York close. [ID:nLDE72U1J8]
Most analysts contend Ireland was not a big risk to the euro since there is no systemic risk due to the euro zone rescue fund.
In the options market, volatility was generally pressured, with 1 month EUR/USD EUR1MO= extending recent 11-month lows to 9.7 amid sales of 1-week vol from 10.7-10.4.
The euro also hit a 10-month high versus the yen EURJPY=R at around 117.90 yen.
"The euro has priced in a lot of good news, so it's hard to see it moving rapidly higher. But it can definitely continue on the upside," said Raghav Subbarao, currency analyst at Barclays Capital.
"The ECB wants to show they are concerned about inflation, but there are clearly other risks and they have kept the full allotment of open market operations, given concerns about financial stability."
Anticipation that Japan would buck the global tightening cycle and leave interest rates low to support its quake-hit economy encouraged players to sell the yen to fund higher-yielding investments in a revival of the carry trade.
The dollar rose to a three-week high of 83.21 yen JPY before running into selling by Japanese banks and foreign players along with some fiscal year-end yen demand from Japanese exporters.
Strong offers were seen from 83.30 to 83.50, with more around 84.00. It last traded at 82.73.
"The yen should trade in the 80-85 range over the near term, but we should see a break to the upside in the secondquarter," said Nomura's Nordvig.
Nordvig recommended six-month dollar calls in dollar/yen.
The Australian dollar hit a fresh 29-year high of $1.0362 AUD=D4 after favorable retail sales and credit growth data. (Additional reporting by Neal Armstrong in London; editing by Jeffrey Benkoe)