* Euro supported by expected ECB rate rise
* Aussie boosted after strong retail sales data
* U.S. employment data eyed before monthly report
By Rika Otsuka
TOKYO, July 2 (Reuters) - The euro firmed against the dollar
on Wednesday, extending the previous day's gains on expectations
the European Central Bank will bump up interest rates later this
week.
The Australian dollar jumped after surprisingly strong retail
sales data showed demand in the economy remained robust, despite
surging oil and high interest rates. []
But activity was subdued in Asian trade as many investors
retreated to the sidelines ahead of an ECB policy meeting on
Thursday and the ever-important monthly U.S. employment report
due the same day.
The market is eyeing both events for possible hints about
future monetary policy paths in the euro zone and the United
States.
The ECB is widely expected to lift interest rates by a
quarter percentage point to 4.25 percent this week.
"The market is pricing in a rate hike and hawkish comments
supporting expectations for further monetary tightening beyond
this month," said Tsutomu Soma, senior manager of foreign assets
at Okasan Securities.
"If comments are not hawkish enough, a wave of profit-taking
is likely to hit the euro," he said.
ECB President Jean-Claude Trichet, who is due to hold a
post-meeting news conference on Thursday, is also slated to speak
on Wednesday at 0715 GMT.
A rise in oil added to the gloom surrounding the dollar. U.S.
crude rose more than $1 to $142.29 a barrel <CLc1>, within sight
of Monday's record high of $143.67 a barrel.
"Investors are hesitating to buy the dollar, with oil
remaining on such a bullish trend," said a trader at a big
Japanese bank.
Moves in oil prices are seen as key for the dollar, as
surging oil has fanned fears about the ability of U.S. consumers
and businesses to weather a housing market-led downturn.
The euro edged up 0.1 percent from late Tuesday U.S. trade to
$1.5809 <EUR=>, helped by prospects that an ECB rate increase
would boost the euro's yield appeal against the dollar.
Federal Reserve Bank of Atlanta President Dennis Lockhart
said on Tuesday that the U.S. central bank must "react
decisively" to stop inflation from pushing up wages, giving a
clear hint about the possibility of a rate rise ahead.
[]
But the market showed muted reaction as investors have begun
to take the view that U.S. economic weakness and worries about
the financial sector will prevent the Fed from lifting rates --
currently at 2 percent -- in the near future.
The Bank of Japan is expected to leave rates at 0.5 percent
for a while.
The dollar fell 0.2 percent to 105.94 yen <JPY=>.
But dollar selling was limited a day after Institute for
Supply Management data showed U.S. factory activity unexpectedly
expanded in June after four straight months of contraction.
[]
The euro steadied at 167.50 yen <EURJPY=R>.
The Aussie climbed 0.5 percent to $0.9600 <AUD=D4>,
recovering from losses made on Tuesday, when the Reserve Bank of
Australia kept rates at 7.25 percent and signalled more rate
hikes were unlikely in the near term.
The Aussie hit a 25-year high of $0.9668 on Monday.
Investors will closely watch June U.S. private sector jobs
numbers and May factory orders due later in the day for what they
might signal about Thursday's employment data and the pace of
economic growth.
(Editing by Chris Gallagher)
