* U.S. dollar drops; euro may test $1.3950 area
* ECB meets on Thursday, may sound hawkish on inflation
* Swiss franc hits record on Middle East, Africa turmoil
(Updates prices)
NEW YORK, March 2 (Reuters) - The euro rose to a near
four-month high against the dollar on Wednesday and looked set
to extend gains on growing expectations interest rates in the
euro zone will rise earlier than those in the United States.
The Swiss franc soared to a record high against the dollar
as escalating tensions in Libya and fears of contagion to other
oil-rich countries, especially Saudi Arabia, prompted investors
to seek safety in the Swiss currency. For details, see
[]
The European Central Bank holds its policy meeting on
Thursday. With oil prices trading above $100 a barrel <CLc1>
<LCOc1> and euro zone inflation well above target, investors
expect the ECB to sharpen its anti-inflation rhetoric.
After struggling in recent sessions to break above
resistance at $1.3862, its previous 2011 high, the euro pierced
that level as North American trading got underway.
The euro could make a run toward $1.40 should post-meeting
comments from ECB President Jean-Claude Trichet reinforce
expectations of an interest rate hike, analysts said.
"The perception is growing in the market that the ECB will
certainly be hiking rates sooner than the Fed and that has
really underpinned the euro for the time being," said Greg
Salvaggio, senior vice president of capital markets at Tempus
Consulting in Washington.
The euro <EUR=EBS> climbed as high as $1.3890 on trading
platform EBS, its strongest level since Nov. 9. It last traded
at $1.3869, up 0.7 percent on the day.
Euro zone producer prices rose in January at the fastest
rate in the history of the single currency, data showed on
Wednesday, highlighting the risk that the ECB may raise rates
sooner than expected. []
Traders reported option-related offers ahead of $1.39.
Further upside targets include $1.3947, around the 76.4 percent
retracement of the euro's fall from November to January, and
$1.3958, the 200-week moving average.
The dollar index <.DXY>, which tracks the greenback against
a basket of major currencies, fell to as low as 76.529, its
lowest since early November 2010.
EURO AS SAFE-HAVEN
The U.S. currency has been unable to benefit from the
recent spike in risk aversion amid political tensions in the
Middle East and North Africa, prompting some investors to
question whether the dollar has lost its safe-haven status.
"People are starting to view the euro as a counter to the
dollar in times of turmoil simply because they both offer equal
security. However, the euro is offering higher yields,"
Salvaggio said.
The dollar has come under pressure as investors focused on
the view that higher oil prices would push other central banks
to raise interest rates to combat inflation even as the Federal
Reserve maintains its stimulative monetary policy.
Investors also fret that rising energy costs could hurt
U.S. consumer spending, which accounts for about two-thirds of
the U.S. economy.
However, some analysts said if tensions escalate, concerns
about the impact of soaring oil prices on the global economy
could sour investor appetite for risk and help the dollar
regain its safe-haven status.
"If there is no resolution to the crisis in the Middle
East, oil prices will stay elevated and people will stop
focusing on the inflationary impact. The euro is in favor now
but in two to three weeks it could be the dollar," said Simon
Derrick, currency strategist at Bank of New York Mellon.
The dollar was little changed at 81.89 yen <JPY=EBS>, after
falling as low as 81.57 yen on EBS, a near one-month low. The
greenback hit an all-time low of 0.9202 Swiss franc on EBS and
was last down 0.5 percent at 0.9237 <CHF=EBS>.
Some traders said the dollar could get a respite if U.S.
non-farm payrolls jobs data for February, due on Friday, comes
in stronger than expected, bolstering the case for the Federal
Reserve to wind down its $600 billion bond-buying program.
U.S. private-sector employers added more jobs than expected
last month, data showed on Wednesday. []
