* Euro slips but seen rising to $1.50
* Central bank policy seen favoring euro
* Debt ceiling debate seen weighing on US dollar
(Fixes typo in first paragraph)
By Julie Haviv
NEW YORK, April 15 (Reuters) - The euro slipped on Friday
but its uptrend of the past three months still looks intact,
with the prospect of more interest rate rises from the European
central bank seen offsetting concerns about the ability of some
poorer euro zone countries to pay their debts.
The euro is up nearly 8.0 percent against the U.S. dollar
and 10.4 percent versus the yen in 2011, helped by interest
rate differentials with the the short end of the euro zone
yield curve significantly above the U.S. yield curve,
Inflation accelerated in Europe and Asia in March while the
United States bucked the global trend with underlying price
pressures largely in check, leaving monetary policy set by the
ECB and the Federal Reserve diverging paths [].
"You have two central banks with two different monetary
policy stances, with the euro the clear winner in this interest
rate game," said Bruce McCain, senior vice president and chief
investment strategist at Key Private Bank in Cleveland, Ohio.
"The concern is rising oil and commodity prices and I fear
that consumers will get spooked enough to dramatically lower
spending, which will make U.S. economic growth even weaker."
That could push Federal Reserve interest rate rises even
further down the road, he said.
"We are bearish on Treasuries and prefer to maintain a
minimal position," McCain said.
The ECB raised its benchmark interest rate to 1.25 percent
from 1.0 percent last week, its first rate hike since July
2008, but many economists believe the Fed will not raise rates
until early in 2012. Investors are pricing in the chances of
two more ECB rate increases before the end of this year
<ECBWATCH>.
In late afternoon New York trading, the euro <EUR=EBS> was
down 0.4 percent at $1.4432, off a 15-month high of $1.4521
touched earlier this week. The euro was down about 0.3 percent
this week.
However, Deutsche Bank said the euro looks capable of
extending its gains to near $1.50, or 30 percent above
purchasing power parity (PPP).
History shows that an overvaluation of 30 percent would
give a clear bearish euro signal for the subsequent 12 months
and typically, the euro corrects by 10 percent once a 30
percent overvaluation is reached, the bank said.
"With the first quarter behind us, it is now evident the
clearest trend has been euro strength; not only did it go up
almost continuously, the euro outperformed all other G10
currencies."
"The near-term picture remains fairly positive for the
euro. But the strength of performance alone suggests that the
euro will struggle to outperform over the next quarters, while
medium-term drivers suggest it is too late to jump on to the
uptrend," the bank said.
The U.S. dollar slipped 0.5 percent against the yen though
on Friday to aroun d83.12 yen <JPY=>. The yen has risen in six
of the last seven sessions and was on track for best weekly
performance against the dollar in about nine months with gains
this week of 2.1 percent.
US DOLLAR STILL VULNERABLE
The U.S. dollar, meanwhile, remains vulnerable to the risk
that the U.S. Congress may not raise the limit on the
government's debt ceiling before the limit is hit around May
16.
"The USD dodged the 2011 budget bullet last weekend and is
now facing the debt ceiling cannonball," said Steven Englander,
head of G10 strategy at CitiFX in New York.
The U.S. Congress on Thursday approved a budget deal to
avert a government shutdown, but mass defections in both
parties highlighted the difficult fights ahead on spending and
debt reduction [].
Foreign exchange markets are increasing the attention they
pay to fiscal sustainability relative to monetary policy,
Englander said.
"The USD will be in big trouble if investors get the sense
that the debt ceiling negotiations have gone beyond the
expected choreography into a zone where there is perceived risk
to US credit."
"The FX response may be non-linear so G10 countries may
have a false sense of security in seeing little FX response to
deterioration so far," he said.
(Additional reporting by Gertrude Chavez-Dreyfuss in New
York)
