* Dollar rises broadly, hits seven-month high vs yen
* Fed stance on rates, oil price drop seen aiding economy
* ECB expected to keep rates unchanged on Thursday
(Recasts, updates prices, changes byline)
By Lucia Mutikani
NEW YORK, Aug 6 (Reuters) - The U.S. dollar rose for a
fourth straight day to a seven-month peak versus the yen and a
six week high against the euro on Wednesday, as the slide in
oil prices to a new three month low raised hopes economic
growth would pick up and inflation would subside.
"The broader (U.S. dollar) rise is also piggy-backing on
the renewed appetite for risk after yesterday's equity market
rally, said Adam Fazio, currency strategist at CIBC World
Markets in New York. "We are seeing an improved atmosphere for
risk appetite based on the slightly dovish Fed statement."
On Tuesday the Fed kept short term interest rates unchanged
but was perceived as being slightly more concerned about anemic
economic growth than it was about inflation, meaning it was
unlikely to raise interest rates in the near future.
UBS said its risk index, a measure of investors' appetite
for risk, tumbled to -0.46 on Wednesday, its lowest level since
June 2007, compared to 0.10 on Tuesday. An increased appetite
for risk usually means the revival of the so-called "carry
trade" in which investors borrow in low interest currencies
such as the yen, and sell the proceeds to invest them in higher
yielding assets such as equities.
The dollar's break above a key technical level around
108.60 yen also contributed to the greenback's rally.
"It's more of a technical circumstance, as 108.60 had been
a correction high since we traded down below 100 and bottomed
out at 95.71," said Fazio. "The break of 108.60 triggered a
bunch of model fund buying interest."
The dollar raced to 109.71 yen <JPY=>, its highest level
since early January, according to Reuters data. It was last
trading at 109.60 yen, up 1.2 percent on the session. The
dollar was on track for its highest daily gain versus the
Japanese currency in three weeks.
DEMAND FOR EURO FALLS
Demand for the euro fell ahead of the European Central Bank
policy meeting on Thursday.
While the bank is expected to leave benchmark borrowing
costs steady at 4.25 percent, analysts think ECB President
Jean-Claude Trichet could soften his hawkish rhetoric, citing
more data pointing to slower euro zone growth.
A report on Wednesday showed German manufacturing orders
for June dropped by a sharp 2.9 percent. Separately a German
government source said the economy probably shrunk by between
0.75 percent and 1.5 percent in the second quarter.
The euro fell against the U.S. dollar and last traded down
0.3 percent at $1.5412 <EUR=>, a six week low.
"Now the market's attention is shifting to the ECB meeting
tomorrow and Trichet is likely to make some pretty hawkish
remarks," said Meg Browne, senior currency strategist at Brown
Brothers Harriman in New York.
"But he will also have to acknowledge that economic growth
in Europe has been pretty slow."
While the interest rate differentials between the United
States and Europe still favor the euro in the short term,
Browne said slowing growth in the euro zone will eventually
lead the ECB to cut borrowing costs despite worries about
inflation.
A Reuters poll of 61 strategists taken Aug. 4-6 showed most
expect the euro to trade at around $1.54 over the next three
months, before retreating to $1.50 in six months and $1.44 a
year from now.
The ICE Futures US dollar index, which tracks the dollar's
performance against a basket of six currencies rose to a seven
week high around 74.293 <.DXY>.
(Additional reporting by Vivianne Rodrigues;)
