(Recasts with reaction to US data, updates prices, adds
comment, changes dateline, previous LONDON).
NEW YORK, May 8 (Reuters) - The euro rallied on Thursday,
recovering from a two-month low against the dollar after the
European Central Bank left interest rates unchanged and its
president's comments focused more on inflation than some had
expected.
ECB President Jean-Claude Trichet said the central bank
must ensure inflation remains temporary even as risks to euro
zone growth prevail. Trichet was speaking at a news conference
after the European Central Bank kept benchmark interest rates
steady at 4 percent. For more details, click [].
The ECB's decision followed an earlier one from the Bank of
England which held rates steady at 5 percent.
Trichet seems to be signalling steady rates, said a Gain
Capital trader. "He does not deliver too much of the dovishness
some were expecting, sounding very neutral in his statement sos
far."
This was euro-positive, the trader said, as investors who
had sold the euro short on expectations it had more room to
fall would need to buy back those positions to prevent losses.
The euro was last at $1.5427, up 0.2 percent from the New
York close <EUR=>. Earlier it had fallen to its lowest since
March 11 and down 4.5 percent from April's record high.
The dollar was up 0.1 percent against a basket of six major
currencies at 73.623, having earlier hit a two-month high at
73.895 <.DXY>.
The single currency has been sliding in recent weeks after
hitting a record high of $1.6018 on April 22 as poor economic
data has started to eat away at perceptions of a resilient euro
area economy and increased prospects of rate cuts to come.
The ECB faces a policy dilemma in the current climate of
high food and oil prices and slowing growth as the currency
zone is proving vulnerable to fallout from the global credit
crisis.
In a volatile session, the euro was down prior to Trichet
speaking on a Financial Times report that unidentified U.S. and
European officials want the dollar to strengthen.
European Union officials later played down the report. In
Brussels, a source linked to the Eurogroup of European Union
finance ministers said: "I am not aware of any high-level
contacts taking place."
The dollar fell 0.8 percent against the yen to 103.78
<JPY=> as sagging stock markets encouraged the unwinding of
carry trades.
In the carry trade investors sell low-yielding currencies
like the yen to fund purchases of higher yielding assets.
"The yen is generally well-bid on the day. There is still
risk aversion in the market. That move in dollar/yen was an
offshoot of euro/yen falling,' said Brian Dolan, chief currency
strategist at Forex.com in Bedminster, New Jersey.
Dolan added that a weak opening for the Dow would further
undermine the dollar.
While UK rates were held steady at 5 percent, the pound
<GBP=> gained 0.3 percent against they dollar to trade at
$1.9590. The gains came even as rates are still seen as falling
soon with many forecasting a cut will come in June [].
"The BoE rate cutting cycle is not over with the next cut
likely in June," said BBH in a note to clients. "The focus
will be on the minutes (released on May 21) where at least one
or two doves will likely have voted for a cut."
Economic data in Britain has reflected a sharply slowing
economy, with house prices slipping rapidly.
Elsewhere, the New Zealand dollar slid 1.3 percent versus
the U.S. dollar <NZD=> after data showing the country's biggest
quarterly employment drop in 20 years stoked expectations for
its central bank to start cutting rates later in the year.
[].
U.S. weekly jobless claims had little impact on foreign
exchange markets.
(Reporting by Nick Olivari, additional reporting by Gertrude
Chavez, Editing by Chizu Nomiyama)
