(Recasts; updates prices)
* Dollar falls as euro zone inflation scales record peak
* New York manufacturing gauge tumbles in May
* ECB July rate hike almost certain
By Lucia Mutikani
NEW YORK, June 16 (Reuters) - The dollar fell versus the
euro on Monday, snapping a three-session winning streak, as
record euro-zone inflation cemented expectations of a European
Central Bank interest rate hike next month and as oil prices
spiked to record highs.
A $2.8 billion quarterly loss from investment bank Lehman
Brothers Inc <LEH.N>, an unexpectedly steep contraction in
manufacturing in New York state and another dose of
inflation-busting talk from an ECB official also soured the
mood for the dollar.
The U.S. currency rallied last week as traders bet the
Federal Reserve could start raising interest rates as early as
August to curb rising price pressures and inflation
expectations.
"There wasn't really much of a catalyst for the U.S. dollar
to build up on gains that we saw last week. News of losses at
Lehman Brothers as well as a spike in oil prices have
contributed to dollar weakness," said Vassily Serebriakov, a
currency strategist at Wells Fargo in New York.
"The U.S. dollar had a very good week last week. People
have been prompted to take profits on last week's gains and
adopt a wait-and-see stance."
The euro raced to a session high of $1.5517 <EUR=>, pushing
further away from Friday's one-month low around $1.5300,
according to Reuters data. It was last at $1.5472 <EUR=>, up
0.6 percent on the day.
Euro-zone inflation rose to a record high of 3.7 percent
year-on-year in May, prompting hawkish comments from ECB
Governing Council member Nout Wellink, who said stabilizing
inflation in the medium-term was a priority.
At the same time, U.S. economic data showed the New York
Fed's "Empire State" general business conditions index fell to
minus 8.68 from minus 3.23 in May, worse than market
expectations for a reading of minus 2.00. U.S. crude oil
futures soared close to $140 per barrel.
ECB RATE HIKE A DONE DEAL
Analysts said the surge in May's annual euro-zone inflation
rate together with Wellink's comments suggested that a July ECB
rate hike was almost certain.
"It pretty much puts a lock on it, unless we hear something
different from Trichet," said Brian Dolan, chief strategist at
Forex.com in Bedminster, New Jersey.
ECB President Jean-Claude Trichet earlier this month had
laid the groundwork for a July rate hike, saying it was
possible, although not a certainty.
"It's a done deal at this point," said Dolan. "It looks
like some of the dollar euphoria has worn off a little bit, but
overall we are still in the lower half of the euro/dollar
range."
The expected rate hike gave the euro an edge against both
the dollar and the Japanese yen.
The euro climbed to a session high of 167.68 yen, its
highest level since October <EURJPY=>, according to Reuters
data. It was last trading at 167.43 yen, up 0.6 percent.
While an ECB interest rate increase appears certain,
analysts doubt the Fed will follow Chairman Ben Bernanke's
tough inflation talk with action because U.S. economic growth
remains sluggish.
The Washington Post, citing unnamed sources, reported on
Monday that Bernanke does not intend to raise interest rates
because he is more worried that soaring oil prices will slow
global growth rather than fire inflation.
An ECB interest rate increase would further enhance the
appeal of the euro at the expense of the dollar.
"We have seen much hawkish comments from Fed officials,
from Bernanke himself, with a clear signal that rates are on
hold for now and the focus is shifting to inflation and
inflation expectations," said Serebriakov.
"In our view that does not imply that the Fed is about to
start raising rates. We think the consumer is still facing
substantial headwinds in terms of falling house prices and
rising gasoline prices. We think that the Fed will remain on
hold until the end of the year."
U.S. interest rate futures continued to lean toward a Fed
rate hike as early as August. The dollar gave up early gains
versus the yen that had propelled it to a four-month high at
108.58 yen <JPY=>. It last traded flat at 108.20 yen.
Sterling rose 0.9 percent to $1.9634 <GBP=>, while the
dollar fell 0.7 percent versus its Canadian counterpart to
C$1.0217 <CAD=>.
Lehman's quarterly loss, while in line with market
expectations, was a reminder to investors that the credit
crisis was far from over.
(Editing by Leslie Adler)
