FOREX-Weak data drives euro lower, dollar broadly firm

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By Veronica Brown

LONDON, May 7 (Reuters) - Weak euro zone maufacturing and retail data combined to send the euro towards 5-week lows versus the dollar on Wednesday, while the greenback garnered support after hawkish comments from a Federal Reserve official.

Euro area retail sales were much weaker than expected, falling in monthly as well as annual terms [ID:nL07774862], while German manufacturing orders unexpectedly fell by 0.6 percent in March -- underlining concerns about the slowing economy.

A run of poor economic data has pressured the single currency in recent weeks after it hit a record high above $1.60, peeling away perceptions that the euro area was insulated from the U.S. downturn.

"The euro zone retail sales were particularly disappointing, it does suggest that European consumers are slowing down. All the data suggest the outlook is deteriorating for Europe and that's consistent with downward pressure on the euro," said Teis Knuthsen, currency strategist at Danske Markets in Copenhagen.

French trade data added to the bearish picture; the single currency's second biggest economy reported a record trade deficit for March.

Still, the European Central Bank is expected to hold interest rates steady on Thursday at 4 percent, leaving the focus on the post-decision briefing by ECB president Jean Claude Trichet, who is expected to maintain a hawkish line on inflation.

The euro traded 0.6 percent down on the day at $1.5433 EUR=, near a five-week low hit last week at $1.5359 and around 3.5 percent off a record $1.6018 struck on April 22.

The dollar rose more than half a percent to 105.33 yen JPY=, nearing a two-month high around 105.70 yen touched on Friday. Against a basket of currencies the dollar firmed half a percent to 73.413 .DXY.

PREMATURE DOLLAR STRENGTH?

The dollar drew early support from a Federal Reserve official's comments that helped cement views that the U.S. central bank's cycle of aggressive interest rate cuts may be ending.

Kansas City Fed President Thomas Hoenig said late on Tuesday that rates will need to be raised in a timely way as the central bank grapples with a serious threat of inflation, prodding the euro towards a five-week low versus the dollar. [ID:nN06528406]

Also boosting the dollar were comments from U.S. Treasury Secretary Henry Paulson, who told the Wall Street Journal in an interview that "the worst is likely to be behind us" from the crisis spawned by surging defaults on U.S. home mortgages. [ID:nN06526869]