(Updates prices, adds quote)
By Toni Vorobyova
LONDON, March 31 (Reuters) - The euro held firm versus the
dollar on Monday after higher-than-forecast euro zone price data
reinforced expectations that the inflation-focused European
Central Bank will not start cutting rates soon.
Annual euro zone inflation jumped to a record high of 3.5
percent in March, out-stripping the 3.3 percent consensus.
"It's higher than expected and it will do nothing to calm
down the ECB's concerns, and until we get some evidence that the
much-feared second round effects aren't materialising, then the
ECB is going to stay hawkish," said Adam Cole, global head of FX
currency strategy at RBC Capital Markets.
"I think (the euro) will continue to grind higher, back up
towards the historic high, and I think we will test $1.60 before
too long."
The euro rose as high $1.5834 after the data -- around 2/3
of a cent short of the record highs set two weeks ago <EUR=> --
before retreating a little to around $1.5807 by 1113 GMT.
In the United States, the Federal Reserve, more concerned
than the ECB about slowing growth, has slashed rates by 300
basis points since September and is seen moving again next month
<FEDWATCH>.
The contrasting interest rate and growth paths have pushed
the euro 8 percent higher versus the dollar since the start of
the year, on track for its best quarter since late 2004.
The single European currency scaled all-time peaks at 79.67
pence <EURGBP=>, with sterling depressed by soft housing and
service sector data.
Speaking just before the euro zone data was released, ECB
Governing Council member Erkki Liikanen said there are upside
pressures to inflation in the euro zone, echoing the tone of
recent comments from fellow policymakers.
Money markets are now pricing in an around 90 percent chance
of a 25 basis point ECB rate cut from the current 4 percent by
year-end -- compared with expectations of nearly 75 basis points
of easing a month ago <FEIZ8>.
RISK AVERSION PERSISTS
Higher-yielding currencies like the Australian <AUD=> and
New Zealand <NZD=> dollars tracked equity markets lower,
indicating that nervousness about the health of the global
economy remains at the forefront of investors' minds.
Adding to a risk averse mood were end-quarter tensions in
the short-term money markets, which have persisted despite
liquidity pumping measures from major central banks.
Investors shied away further from relatively risky carry
trades in which low-yielding currencies like the yen are used to
fund investment in high-yielders such as the Aussie.
The dollar has also taken on low-yielding status as the
Fed's easing has taken the policy rate to 2.25 percent -- the
second lowest among major economies after Japan [].
The yen, however, failed to benefit from the increased risk
aversion, as fiscal year-end activity from Japanese investors
and corporates kept the currency under pressure, traders said.
The dollar rose half a percent at 99.65 yen <JPY=>, while
the euro edged up to 157.52 yen <EURJPY=>.
Monday is relatively light on the U.S. data front, so
investors are looking ahead to the Institute for Supply
Management's March manufacturing and service sector surveys on
Tuesday and Thursday respectively, followed by the non-farm
payrolls report on Friday.
"A rise in people filing for unemployment claims in March, a
worsening in the forward-looking indicators of activity and a
drop in household employment expectations mean a 3rd consecutive
contraction in non-farm payrolls is highly probable," Lloyds TSB
Corpoates & Markets said in a research note.
(Editing by Gerrard Raven)
