* Dollar gains on euro as credit rating fears ease
* Sterling hits $1.60 for first time since November
* Five-year Treasury auction attracts strong demand
* Euro struggles after ECB official comment on rates
(Recasts, adds details, comment, changes data)
By Steven C. Johnson
NEW YORK, May 27 (Reuters) - The dollar rose against the
euro on Wednesday as fear of an imminent U.S. credit downgrade
faded and a European Central Bank official said interest rates
could fall further if economic conditions worsen.
Sterling, meanwhile, rose above $1.60 for the first time in
nearly seven months, propelled by hopes of improvement in the
UK economy and banking sector.
Fear that soaring U.S. deficits threatened the United
States' AAA credit rating hurt the dollar last week and pushed
the euro briefly above $1.40, its highest level since January.
But for the second straight day, investors turned out in
large numbers to snap up new Treasury debt, easing fears that
the deficit had soured foreigners on holding U.S.
assets.[]
Investor anxiety also waned when Moody's Investors Service
on Wednesday reaffirmed its Aaa U.S. credit rating.
[]
"The last 400 points of the euro move were driven not by
any organic demand for euro but by fear of a possible U.S.
downgrade," Boris Schlossberg, director of FX research at GFT
Forex, said. "That's why $1.40 has been such a cement ceiling
for the euro -- the fear trade has run out of gas."
That has provided investors with an incentive to take some
profits on the euro's run higher, analysts said, adding the
dollar may benefit if European economic data keeps weakening.
The euro was last down 0.6 percent at $1.3899 <EUR=>,
having failed to break above $1.40 earlier in the global
session. The dollar was up 0.2 percent at 95.19 yen <JPY=>
while sterling was up 0.9 percent at $1.6055 <GBP=>.
Earlier, sterling hit $1.6085, its highest level since
early November, while the euro fell 1.4 percent, below its
200-day moving average, to 86.54 pence <EURGBP=>. Hopes that
the UK has already endured the worst of the crisis increased
demand for sterling-denominated assets.
The euro, which has climbed more than 5 percent against the
dollar so far in May, has also been driven by optimism that the
worst of the global recession is over.
But some of those hopes were shaken a bit this week,
analysts said, particularly after European Central Bank
governing council member Erkki Liikannen said the bank's
current key interest rate of 1 percent could go lower.
[]
Currency traders have worried about euro-zone growth after
recent data showed Germany's economy shrank in the first
quarter at its fastest pace since reunification in 1990.
Also, U.S. housing data on Wednesday showed the inventory
of unsold homes rose last month, stoking worries that home
prices have further to fall.
Analysts said that cooled some of the risk appetite that
has recently lifted the euro and other currencies such as the
Australian and New Zealand dollars.
"Things are still not that great out there, so we are a
little skeptical of the 'green shoots' optimism on the economic
side," said Robert Blake, senior currency strategist, at State
Street Global Markets in Boston. "It's going to be a long, slow
recovery and we will have more bad news to come."
Sweden's crown <SEK=> fell sharply after the central bank
said it would boost foreign currency reserves by $13.3 billion
to finance loans to Swedish banks. []
(Additional reporting by Vivianne Rodrigues; Editing by
Kenneth Barry)
