FOREX-Record oil price, slowing growth hem in dollar

(Changes byline, updates prices, adds quotes)

By Simon Falush

LONDON, May 22 (Reuters) - The dollar edged up on Thursday but investors remained downbeat on the currency after the Federal Reserve's 2008 cut its growth forecast and crude oil surged to record highs reinforcing fears on the U.S. economy.

In its April meeting minutes, the Fed also lifted its inflation forecast and suggested it had finished cutting rates after cutting them to 2 percent last month.

Oil jumped over the $135 a barrel mark CLc1, bringing its gains for the year to date to 40 percent and fuelling worries the United States is sliding into stagflation -- a vicious combination of rising inflation and tepid growth.

"People are in two minds about what oil prices will do for the dollar," said Chris Turner, head of FX strategy at ING.

"It can lead to more diversification from central banks and lead them to adjust their reserves out of dollars. But stagflation...can also turn the focus of the Fed to deprioritise growth and focus on inflation, increasing the prospects of higher rates and a dollar supportive yield curve."

By 1000 GMT the dollar was up 0.1 percent at 71.940 .DXY. The euro was down 0.1 percent at $1.15775 retreating from a one-month high of $1.5814 set earlier in the session EUR=.

While the dollar was pinned back by the Fed's gloomy growth forecast, the euro was cheered by Wednesday's surprise improvement in German Ifo business sentiment, which stoked expectations the European Central Bank's next move is likely to be to raise interest rates from the current 4 percent rather than cut them.

Thanks to the ECB's focus on keeping price pressures under control, the surge in oil prices also reinforced the euro's status as a possible hedge against inflation.

The dollar rose 0.25 percent to 103.21 yen JPY=. The euro was also a little firmer at 162.84 yen EURJPY=, but off Wednesday's three-week high at 163.15.

JUMPING KIWI

The biggest mover among the majors was the New Zealand dollar, which jumped more than 1 percent to US$0.7895 NZD= thanks to a bigger than expected $8.2 billion cut in personal taxes in the 2008/9 budget [ID:nWEL285158].

"Markets may have overshot themselves in the pace of rate cuts anticipated so the budget is providing an opportunity to adjust views," UBS said in a research note.

"Also the budget expansion will involve issuing an additional NZ$900 million in debt against original expectations ... With high-yielding good quality sovereign debt highly sought after by international investors, such developments are positive for NZD."