(Recasts, updates prices, adds comment)
NEW YORK, March 31 (Reuters) - The euro came close to a
record high against the dollar on Monday as
higher-than-forecast euro-zone price data reinforced
expectations that the inflation-focused European Central Bank
will not start cutting rates soon.
Annual euro-zone inflation jumped to 3.5 percent in March,
a record since the inception of the euro according to Reuters
data and out-stripping the 3.3 percent consensus.
The outlook for euro-zone rates contrasts with the United
States where the Federal Reserve is widely expected to continue
to cut the benchmark rate in a bid to stoke economic growth.
Higher rates tend to lure investors and increase demand for a
currency.
"Of particular note for the euro was the quickening in the
March CPI," said Nick Bennenbroek, head of currency strategy at
Wells Fargo Bank in New York in a research note. "A positive
for the euro given the European Central Bank's focus on
headline inflation."
The euro rose as high $1.5895 -- just short of record highs
set two weeks ago <EUR=> -- before retreating to around $1.5802
midway through the New York session. It was a volatile session
in both London and New York, with the single euro zone currency
swinging between gains, losses and trading little changed.
The Federal Reserve has slashed rates by 300 basis points
since September in a bid to restart flagging growth and is
expected to cut again as soon as next month <FEDWATCH>.
"While the euro-zone data points to some deceleration of
growth, elevated prices remain the ECB's main concern," said
Marc Chandler, currency analyst at Brown Brothers Harriman in a
research note to clients.
The contrasting interest rate and growth paths have pushed
the euro 8.3 percent higher versus the dollar since the start
of the year. The euro is on track for its biggest quarterly
percentage gains since the fourth quarter of 2004.
Down 6.5 percent, the dollar index is also targeting its
worst performance since the fourth quarter of 2004.
The euro scaled all-time peaks at 79.82 pence <EURGBP=>,
with sterling depressed by soft housing and service sector
data.
Speaking just before the euro-zone data was released, ECB
Governing Council member Erkki Liikanen said there are rising
price pressures in the euro zone, echoing the tone of recent
comments from fellow policy-makers.
Money markets are now pricing in an around 90 percent
chance of a 25 basis point ECB rate cut from the current 4
percent by year-end -- compared with expectations of nearly 75
basis points of easing a month ago <FEIZ8>.
RISK AVERSION PERSISTS
Higher-yielding currencies such as the Australian <AUD=>
and New Zealand <NZD=> dollars tracked equity markets,
indicating that nervousness about the health of the global
economy remains at the forefront of investors' minds.
Adding to a risk-averse mood were end-quarter tensions in
the short-term money markets, which have persisted despite
liquidity-pumping measures from major central banks.
Investors shied away further from relatively risky carry
trades in which low-yielding currencies such as the yen are
used to fund investment in high-yielders such as the Aussie.
The dollar has also taken on low-yielding status as the
Fed's easing has taken the policy rate to 2.25 percent -- the
second-lowest among major economies after Japan [].
The yen, however, failed to benefit from the increased risk
aversion, as fiscal year-end activity from Japanese investors
and corporates kept the currency under pressure, traders said.
The dollar rose 0.8 percent at 99.91 yen <JPY=>, while the
euro climbed 0.8 percent to 157.80 yen <EURJPY=>.
Dollar/yen, down 10.3 percent this year, is having its
worst quarterly performance since the third quarter of 1999.
Reports showing business activity in the U.S. Midwest
contracted in March for the second consecutive month and
activity in New York city weakened in March, failed to impact
currency markets.
(Reporting by Nick Olivari, Additional reporting by Toni
Vorobyova in London, Editing by Chizu Nomiyama)
