* Euro pulls back from 5-month high vs dlr hit on Monday
* Hurt by Portugal downgrade and threats to stop buying debt
* China hikes rates; dents AUD, EUR but reaction limited
* Sterling rallies as data adds to rate hike chances
(Adds graphic, detail, updates prices)
By Jessica Mortimer
LONDON, April 5 (Reuters) - The euro fell from a five-month high versus the dollar on Tuesday, knocked by a Portugal ratings downgrade and a rise in Chinese interest rates, while sterling jumped after strong data boosted the chances of a UK rate hike.
The Chinese hike [ID:nBJD000260], by 25 basis points, also dented higher-yielding currencies like the Australian dollar, which slipped to a session low against the greenback.
Moody’s cut Portugal’s sovereign debt rating by one notch [ID:nLDE7340AM], saying debt problems on the euro zone periphery may prevent the European Central Bank from raising rates three times this year, which the market is pricing in. ECBWATCH
Reports that Portugal’s biggest banks threatened to stop buying its government’s debt, instead urging the caretaker administration to seek a short-term loan, also put pressure on the single currency.
However the euro was expected to stay stuck in its recent range after Monday’s rally to a five-month high stalled ahead of resistance around $1.4280. This coincides with November’s high of $1.4283 and a trendline drawn from the July 2008 record high.
“The euro has stalled ahead of the $1.4280 level. It is still in an uptrend though people are wary of taking the euro higher ahead of the ECB meeting,” said Adrian Schmidt, currency strategist at Lloyds.
“I think it will break $1.4280 but we may need to see a narrowing in peripheral yield spreads (over German Bunds) before it makes much progress above there”.
Traders said a break to the topside would expose large option barriers at $1.4350 and $1.4400, expiring around the middle of April. They also highlighted a large option at $1.4100, expiring on Friday, which could influence price action.
The single currency continued to garner support from widespread expectations for a 25 basis point rate hike by the ECB on Thursday, with reported bids from $1.4140 seen limiting losses.
Further resistance was at $1.4374, the 76.4 percent retracement of the euro’s slide from November 2009 to June 2010.
“There is a lot of good news priced into the euro already and (ECB President Jean-Claude) Trichet will have to support the rate view to keep the positive momentum,” said Niels Christensen, currency strategist at Nordea in Copenhagen.
The high-yielding Australian dollar fell 0.6 percent, passing through reported bids at $1.0300 to trade down to $1.0288, taking it further from a 29-year high of $1.0422 hit Monday.
The Aussie is typically the most sensitive to moves by China to tighten monetary policy, which may weigh on growth in Australia’s key trading partner.
For a graphic on Chinese interest rates click on
An unexpected leap in UK services sector activity to a 13-month high buoyed the pound, lifting it up to 1 percent higher versus the euro as the market moved closer towards pricing in a UK rate hike in June. [ID:nSLA4FE7SE] BOEWATCH
“Sterling is the main mover after the PMI data was vastly higher than expected and there may be a little more potential for UK rate expectations to be pulled up further,” Lloyds’ Schmidt said.
Sterling was up 0.6 percent against the dollar GBP=D4 at $1.6228.
Later on Tuesday, minutes of the Federal Reserve March 15 meeting will be scrutinised for hints on whether U.S. policymakers may be edging towards a tighter stance. Some Fed officials have struck a hawkish tone recently, although others have remained dovish.
The U.S. dollar .DXY was up 0.2 percent against a basket of currencies at 76.025.
The dollar rose 0.3 percent to 84.30 yen JPY=, edging closer to a six-month peak of 84.735 yen set on Friday. A 200-day moving average at around 83.55 is now seen acting as support.
Additional reporting by Neal Armstrong, editing by Ron Askew