* Euro zone flash inflation rises to 2.6 pct year-on-year
* Euro firms broadly as interest rates expected to rise
* Month-end demand helps euro, Irish stress test results due
(Adds comment, details, updates prices)
By Neal Armstrong
LONDON, March 31 (Reuters) - The euro rose broadly on
Thursday as above-forecast euro zone inflation cemented the case
for higher interest rates from the European Central Bank, though
analysts cautioned against a rapid rise in the currency.
Traders said significant quarter-end and fiscal year-end
flows were helping to boost the euro, at the expense of the
dollar in particular.
Official euro zone estimates showed consumer prices jumped
2.6 percent year-on-year in March, up from 2.4 percent in
February and more than market expectations.
They supported comments from European Central Bank
policymaker Lorenzo Bini Smaghi who on Wednesday implied the
central bank's policy is to gradually raise interest rates.
Markets see the tightening cycle starting in April.
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"The euro has priced in a lot of good news so it's hard to
see it moving rapidly higher, but it can definitely continue on
the upside," said Raghav Subbarao, currency analyst at Barclays
Capital.
"The ECB wants to show they are concerned about inflation
but there are clearly other risks and they have kept the full
allotment of open market operations given concerns about
financial stability."
Ireland later on Thursday announces the results of stress
tests that are expected to signal the effective nationalisation
of the entire financial system, but few analysts were expecting
a major reaction from the single currency.
"Ireland is not a big risk to the euro as there is no
systemic risk thanks to the euro zone rescue fund. Confidence is
being driven by the larger euro zone countries," said Manuel
Oliveri, currency analyst at UBS in Zurich.
The euro rose 0.6 percent against the dollar <EUR=> to
$1.4220, approaching its 2011 high of $1.4249. Traders cited
demand from European central banks, while adding that a break of
option barriers at $1.4250 would be needed for further momentum
on the upside.
The single currency hit a 10-month high versus the yen
<EURJPY=R> around 117.90 yen.
Given the market's certainty that the ECB will deliver a 25
basis point rate rise next month, analysts said the market's
focus was on how far and how fast rates will continue to rise,
adding that such forecasts will determine the euro's outlook.
"There is nothing in the inflation figures that suggests
that the ECB needs to move forward more aggressively and the
euro is vulnerable to a repricing of tightening risk once next
week's rate hike is out of the way, said Lena Komileva, global
head of G10 strategy at BBH.
DOLLAR PRESSURED
The dollar came under broad selling pressure, falling
roughly 0.5 percent against a currency basket <.DXY>.
Market participants said U.S. investors were likely selling
the dollar to rebalance their portfolios given significant
losses in European and Japanese stock markets this month.
Despite the U.S. currency's broad losses, it was flat
against the yen at 82.80 yen, as the yen stayed on the backfoot
versus most major currencies.
Anticipation that Japan would buck the global tightening
cycle and leave interest rates low to support its quake-hit
economy is encouraging players to sell the yen to fund
higher-yielding investments, in a revival of the carry trade
that flourished before the credit crisis began in 2007.
The dollar rose to a three-week high of 83.21 yen <JPY>
before running into selling by Japanese banks and foreign
players along with some fiscal year-end yen demand from Japanese
exporters. Strong offers were seen from 83.30 to 83.50, with
more around 84.00.
The Australian dollar hit a fresh 29-year high of $1.0362
<AUD=D4> after favourable retail sales and credit growth data.
(Additional reporting by Naomi Tajitsu; editing by Stephen
Nisbet)
