Euro near highs as more rate rises expected

By Rika Otsuka

TOKYO, Aug 22 (Reuters) - The euro trimmed gains against the dollar on Tuesday on light profit-taking but stayed in sight of a two-month high on expectations that the European Central Bank will keep raising interest rates.

Against the yen, the euro hovered near its highest level since the single European currency was launched in 1999, on forecasts its yield advantage will widen.

"It's clear that euro rates are going to rise faster than Japanese ones, which is making it easy to buy the euro against the yen," said Hideaki Furumaya, forex manager at Trust and Custody Services Bank.

He added that the euro's rate outlook was also offering some support to the single currency against the dollar.

The ECB is expected to tighten credit again after bumping rates up to 3 percent earlier this month, while the Bank of Japan has said it will take its time hiking rates after lifting them to 0.25 percent last month in its first rise in six years.

The Federal Reserve is widely expected to leave its key funds rate at 5.25 percent in September.

The Fed kept rates unchanged at a policy meeting earlier this month due to cooling U.S. economic growth after pushing them up 17 straight times since June 2004.

A Reuters survey of 60 economists showed most see the U.S. economy slowing down enough to prompt a rate cut by the Fed in the second half of next year.

By 0530 GMT, the euro dipped to $1.2875 from around $1.2890 in late U.S. trade. It rose as far as $1.2940 on electronic trading platform EBS on Monday, the highest since early June.

Robust economic growth figures released last week for the euro zone in the second quarter have helped to boost the euro against the dollar, which has been softened by tame inflation reports and weak housing data.

The euro was nearly flat at 149.40 yen , in sight of a record high of 149.75 yen touched on EBS on Monday.

Traders said it was just a matter of time before the euro pierces the psychological 150 yen level.

Profit taking in the euro against the dollar helped the U.S. currency to climb to 116.10 yen from around 115.85 yen.

The yen slipped in cross trading as investors continued to use the currency to fund carry trades -- where currencies with low rates are used to buy higher-yielding ones. That helped the dollar to firm versus the yen, dealers said.

Market participants said that dollar would continue to trade in ranges while the Fed rate outlook remained murky.

"It's still hard to tell what's in store for the dollar," said Furumaya at Trust and Custody Services.

"There's a feeling in the market that while more consecutive rate rises are now out of the picture, it's not like a rate cut is in the books for the time being. It is not a continuous dollar selling situation."

EURO DATA ON RADAR

Dealers said that with no major U.S. economic data due on Tuesday, the market would focus on figures out of the euro zone.

The ZEW economic research institute releases its August indicator of economic sentiment in Germany at 0900 GMT.

"If ZEW's data comes in stronger than expected, it could prompt more euro buying," said Daisuke Uno, market strategist at Sumitomo Mitsui Banking Corp.

The headline index is likely to show a fall for a seventh straight month to 12.0 from 15.1 in July, according to the median forecast of economists polled by Reuters. Respondents cited high oil prices, rising interest rates and a looming sales tax hike.

Figures for June euro zone industry orders are also due at 0900 GMT.


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