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* Dollar up on profit-taking, jobless claims data
* Greenback still fragile as oil prices keep rising
* High inflation, low growth raise U.S. stagflation fears
By Vivianne Rodrigues
NEW YORK, May 22 (Reuters) - The dollar rose broadly on
Thursday but support remained fragile as oil touched new record
highs and a gloomier Federal Reserve growth forecast added to
fears that the U.S. economy may be heading toward stagflation.
Firm euro zone economic data this week and persistent
inflation boosted the euro to $1.5814 overnight, a one-month
high, but it retreated when investors began taking profits.
A report showing Americans filed fewer than expected
applications for first-time jobless benefits also provided a
dollar boost, as it showed the U.S. labor market is "still shy
of typical full-blown recession levels," said Alan Ruskin,
international strategist at RBS Greenwich Capital in Greenwich,
Connecticut.
But traders said the market remained focused on oil, which
jumped above the $135-a-barrel mark <CLc1>, bringing its gains
for the year to 40 percent and feeding worries that the United
States is sliding into stagflation -- a vicious combination of
rising inflation and tepid growth.
Still, oil prices eased toward the end of the session and
crude settled at $130.81, down $2.36 on the day.
"Profit taking dominated the session today, but as oil
prices eased a bit, we've seen the dollar extending some of its
gains," said Joe Manimbo, a currency trader at Ruesch
International in Washington.
In late afternoon trading in New York, the euro was last
down 0.5 percent at $1.5703 <EUR=> but remained near the top of
a well-worn $1.54-$1.58 range that has persisted for most of
the month. Sterling rose 0.3 percent to $1.9783 <GBP=> on
stronger-than-expected UK retail sales.
The yen also wilted, as traders expected surging oil prices
to hurt Japan's economy, a net importer of energy. The dollar
rose 1.2 percent to 104.23 yen <JPY=> while the euro rose 0.6
percent to 163.68 yen <EURJPY=>.
"With oil at $135, every economy and every nation's
inflation outlook is at risk," said David Gilmore, a partner at
Foreign Exchange Analytics in Essex, Connecticut.
Analysts said the dollar remains doubly vulnerable. On
Wednesday, the Fed downgraded its 2008 U.S. economic growth
forecast and raised its inflation outlook.
"If growth continues to deteriorate, we could run into a
stagflation situation where nobody wants to hold dollars," said
Robert Kowit, who helps manage a $3 billion bond fund for
Federated Investors in Pittsburgh.
"Then you could face a big downside for the dollar, which
would force people to look at non-dollar assets in other
developed markets to offset their losses," Kowit said.
The Fed has cut its target interest rate from 5.25 percent
to 2 percent since September, but markets now expect it to hold
steady and possibly raise borrowing costs by year end.
Persistently high inflation and a rise in German business
confidence has increased expectations that the European Central
Bank's next interest rate move may be an increase from the
current 4 percent.
(Additional reporting by Steven C. Johnson; Editing by
Jonathan Oatis)
