* ECB holds rates, July rate now widely expected
* Hedge funds heavily short dollars vs euro pre-Trichet
(Recasts, updates prices, adds Trichet comment, fresh analyst quote, changes byline, dateline, previous LONDON)
By Gertrude Chavez-Dreyfuss
NEW YORK, June 9 (Reuters) - The euro surrendered gains against the dollar on Thursday after European Central Bank President Jean-Claude Trichet signaled a rate hike next month that already had been widely expected, leaving little room for further upside in the single currency.
Traders said asset managers were heavily short the U.S. dollar against the euro ahead of Trichet’s statement and were poised to sell the single euro zone currency on any rally.
The euro did rise after Trichet said “vigilance” was warranted, but reversed gains in a sharp move that saw investors whip through stops below $1.46000 $1.45500, and $1.45000.
Trichet, in his statement after the ECB left rates unchanged at 1.25 percent, used the words “strong vigilance”. For the past few years, investors have come to view the words “strong vigilance” as Trichet’s way of signalling an impending rate increase the following month.
For Trichet’s remarks, click on [ID:nFAT007213].
Negative headlines on Greece and wider regional debt concerns have also raised doubts over the prospects for ongoing ECB policy tightening and euro strength.
“The July rate hike has been fully discounted and the euro is suffering from a ‘sell the fact’ price action,” said Richard Franulovich, senior currency strategist, at Westpac Securities in New York.
The last eight times Trichet used those key words, the euro appreciated in the 72 hours that followed, analysts said.
The euro hit a session low at $1.44777 on trading platform EBS EUR=EBS and was last at $1.44894, down 0.5 percent.
Against the yen, the euro was down 0.4 percent at 116.040 EURJPY=EBS.
With Trichet out of the way, the focus could squarely come back to the Greek debt crisis. The continued possibility of Greek debt restructuring was raised again on Wednesday in a letter from German finance minister Wolfgang Schaeuble to the leadership of the ECB, International Monetary Fund and his euro zone peers.
“We are unlikely to see the euro break $1.50 again until the situation with Greece is sorted out,” said Kathleen Brooks, currency strategist at FOREX.com in London.
Greek first quarter GDP data released on Thursday showed a 5.5 percent year-on-year slump. [ID:nATH006146]
Against sterling, the euro EURGBP=D4 slid 0.4 percent at 88.56 pence after the Bank of England kept rates on hold at record lows, as widely expected. [ID:nLAC005850]
Editing by Chizu Nomiyama