* Euro at 4-month high above $1.4 on rate hike expectations
* Middle East buying helps euro erase earlier losses
* Moody's cuts Greece rating, long EUR positions stretched
* Dollar index hits 4-month low
By Jessica Mortimer
LONDON, March 7 (Reuters) - The euro rose to a four-month
high on Monday, pushing above the key $1.40 level on reported
buying by Middle East accounts and expectations of higher
interest rates as the market shrugged off a ratings cut on
Greece.
The euro has been underpinned since European Central Bank
president Jean-Claude Trichet surprised investors on Thursday by
saying that euro zone interest rates may rise next month, and
analysts said this was likely to keep providing support.
The dollar fell to a four-month low against a basket of
currencies on expectations that U.S. monetary policy, by
contrast, will stay loose.
With long euro positions looking stretched, analysts said
the euro could be vulnerable to profit-taking, especially above
$1.40.
The single currency <EUR=> rose 0.2 percent to a four-month
high of $1.4020, according to Reuters data, extending gains
after breaking above reported stop loss orders at $1.4005.
Traders said buying by Middle East accounts helped lift the
currency, which had earlier fallen after Moody's slashed
Greece's debt rating by three notches and kept it on review for
a further possible downgrade. []
"There's a bit of bad news with the Greece downgrade and
Ireland wanting to renegotiate (its) bailout and there's some
focus on this, but it's too early for concerns about sovereign
debt to really come back and hurt the euro," said Niels
Christensen, currency strategist at Nordea in Copenhagen.
Adding to the negative tone, Fitch downgraded Spain's
ratings on Friday. []
The single currency broke above Friday's four-month high of
$1.4009 hit on the EBS trading platform. Traders cited options
barriers at $1.4050.
With the euro having breached resistance at its early
February peak of $1.3862 during last week's rally, one possible
upside target is now $1.4283, a peak on charts hit on EBS in
early November.
Latest positioning data from the U.S. Commodity Futures
Trading Commission pointed to the potential for profit-taking,
however, showing speculators increasing bets in favour of the
euro to the highest level since January 2008. []
The dollar index <.DXY> hit a four-month low of 76.221.
RATE DIFFERENTIALS
The dollar gained support after Friday's above-forecast U.S.
jobs data, which analysts said helped prevent the euro leaping
well above $1.40, though gains were limited as expectations that
U.S. policy will stay loose remained intact. []
Strong job growth is seen necessary for the Federal Reserve
to hold off from conducting further rounds of quantitative
easing. The Fed's second round of QE, consisting of $600 billion
in bond purchases, is due to be completed in June.
"Despite signs of a recovery in the U.S., the Fed will
continue to fight growth risks while the ECB will fight
inflation risks," BNP Paribas analysts wrote in a report.
"With the ECB signalling a rate hike in April to alleviate
inflationary pressures, EUR/USD should remain well supported as
interest rate differentials work in favour of EUR."
The euro was steady against the yen at 115.11 <EURJPY=R>,
having retreated from Friday's peak of 116.00 yen, the euro's
highest against the yen since May 2010.
A trader for a major Japanese bank in Tokyo said Japanese
exporters sold the euro on Friday as it rallied, and added they
might still try to sell the euro above 115 yen.
The dollar eased 0.2 percent to 82.12 yen <JPY=>, pulling
back from Friday's intraday peak of 83.09 yen, with support seen
around 81.60, a level that held after several tests in late
February and early March.
(Additional reporting by Ian Chua in Sydney; Editing by John
Stonestreet)
