* Expectations of higher euro zone rates offset downgrade
* China hikes rates; Australian dollar retreats
* Sterling rallies as data adds to rate hike chances
(Updates prices, adds details, adds byline)
By Wanfeng Zhou
NEW YORK, April 5 (Reuters) - The euro rose to an 11-month
high against the yen and neared a recent five-month peak
against the dollar on Tuesday on expectations of rising euro
zone interest rates that could keep the single currency
supported in months ahead.
Hedge fund adviser Medley Global Advisors said in a report
that the European Central Bank was poised to raise rates on
Thursday -- as expected -- and build in room to tighten
further. The report helped the euro recover from earlier losses
knocked by a ratings downgrade of Portugal. See [].
Expectations of rising UK rates also got a lift after
strong service sector data drove sterling higher. Rate
differentials have moved against the dollar in recent weeks
after comments by Federal Reserve officials signaled an
uncertain outlook for U.S. monetary policy.
Going into Thursday's ECB meeting, the euro will likely
stay in its recent range, capped by resistance near $1.4280,
which marks the November high and a trendline drawn from the
July 2008 record high. Traders expect the euro eventually to
take out that resistance and rise toward $1.50.
"In the months ahead, we're likely to see more hawkishness
out of the ECB than the Fed," said Samarjit Shankar, managing
director of global FX strategy at BNY Mellon in Boston.
In a sign of divergence over the outlook for U.S. rates,
the minutes of the Fed's March meeting released on Tuesday
showed some policymakers believed they would have to hold to an
easy monetary policy course beyond this year, while a few said
the central bank should move to tighter conditions before
year-end. For details, see []
Against the yen, the euro was last up 0.9 percent at 120.67
yen <EURJPY=>, after having risen to 120.69 yen, an 11-month
high, according to Reuters data.
Against the dollar, the euro was flat at $1.4221 <EUR=>,
just below a session high of $1.4245 and near a five-month high
touched on Monday.
Expectations for a 25-basis-point rate hike by the ECB on
Thursday have supported the euro in recent weeks, with reported
bids from $1.4140 seen limiting losses.
CHINA HIKES
Moody's cut Portugal's sovereign debt rating by one notch,
saying debt problems on the euro zone periphery may prevent the
ECB from raising rates an anticipated three times this year.
See []
Credit Suisse in a note to clients said while peripheral
uncertainty clearly remains, with Portugal likely needing aid,
"Spain, the peripheral economy of real systemic importance, has
seen borrowing costs steadily decline this year, almost
completely decoupling from dynamics in Portugal.
"With systemic risks fading, ECB tightening is likely to
keep yield support for the euro elevated." The firm expects the
euro to overshoot its three-month forecast of $1.44 and rise to
$1.50 in 12 months.
The Australian dollar traded down as low as $1.0289
<AUD=D4>, retreating further from its post-float high touched
on Monday. The Australian dollar was floated in December 1983.
China hiked interest rates by 25 basis points, the fourth
rate increase since October []. Given strong trade
links, the Aussie can be the most sensitive to tightening moves
by China. The aussie last traded down 0.2 percent at $1.0339.
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
For a graphic on Chinese interest rates click on
http://r.reuters.com/veh88r
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
An unexpected leap in UK services sector activity to a
13-month high buoyed the pound, which rose as much as 1 percent
versus the euro as the market moved closer toward pricing in a
UK rate hike in June. [] Against the dollar, sterling
rose 0.9 percent <GBP=D4> to $1.6278.
The dollar rose 0.9 percent to 84.82 yen <JPY=>, having hit
as high as 84.88 yen, a more than six-month high, according to
Reuters data. A 200-day moving average at around 83.55 is now
seen acting as support.
(Additional reporting by Nick Olivari; Editing by )
