* Euro pierces $1.40 but fails to hold
* Dollar's safe-haven status trumped by rate differentials
* IMM positioning point to bearish dollar sentiment
* Moody's cuts Greece's credit rating
(Adds quotes, updates prices)
By Julie Haviv
NEW YORK, March 7 (Reuters) - The euro stumbled on Monday
after its recent rally against the dollar as sovereign debt
worries returned, but expectations for higher euro zone
interest rates should continue to favor the currency.
The euro early in the day rose to a four-month high against
the dollar above $1.40, but the gains faded as trading in
London wound down and liquidity began to dry up in New York.
The euro <EUR=> was last at $1.3975, down 0.1 percent on the
day, according to Reuters data.
The euro remains up about 4.5 percent against the greenback
year-to-date, largely on expectations the European Central Bank
will raise rates well before the U.S. Federal Reserve does so.
European Central Bank President Jean-Claude Trichet surprised
investors on Thursday by saying euro zone interest rates may
rise as early as next month.
"It's been a long time since a major power raised interest
rates, so just the thought that the ECB may raise interest
rates is a big deal," said Chuck Butler, president of EverBank
World Markets in St. Louis. He warned, however, that a possible
rate rise "should not overshadow that the euro zone debt
problems could be back if there is no resolution.
"If they do not do something by the end of March, the euro
could pull back," Butler said.
The latest data showed speculators' long euro positions at
their highest level since January 2008 []. The data shows
positions taken only until last Tuesday, two days before before
Trichet spoke on Thursday.
"All are long against USD, but none scream 'overdone,'"
said David Watt, senior currency strategist at RBC Capital
Markets in Toronto.
Instead it looks like the market is just bearish on the
dollar, he said.
"The next IMM report does not seem set to say anything
different," he said.
Greg Anderson, G10 strategist at CitiFX in New York, said
the IMM data showed that the leveraged funds category is at an
eight-month high in terms of participation in the FX market.
"We view this as a sign that the FX market in general is
presently attracting more speculative activity than normal,
which might make it vulnerable to a reversal at some point," he
said. "We suspect the broad trend of USD weakness is triggering
momentum model-driven funds to take positions."
Meanwhile, sovereign debt concerns, which have been largely
dormant in recent months, returned to the forefront as Moody's
slashed Greece's debt rating by three notches and kept Greek
debt on review for a further possible downgrade. For details,
see []
Many economies in the 17-nation euro zone continue to
struggle with low growth and high debt burdens. A euro zone
leaders' meeting later this week may prove to be a test of the
euro's resilience.
At the same time, the dollar's safe-haven appeal has been
diminished despite ongoing geopolitical turmoil, hurt by the
chance of an oil-driven jump in inflation and expectations that
U.S. interest rates will lag those in Europe.
In an interview published on Monday, an ECB Executive
Board member, Jose Manuel Gonzalez-Paramo, said an April rate
increase was possible as the European Central Bank continues
its effort to control inflation. []
The ECB's stance contrasts sharply with that of the Federal
Reserve, which is expected to keep monetary policy loose for
some time. That reflects the Fed's greater concern with the
U.S. economic growth outlook than inflationary pressures.
The dollar was nearly flat against the yen at 82.24 yen
<JPY=>. The euro was down 0.1 percent against the yen at 114.95
<EURJPY=> and was up 0.1 percent at 1.2944 Swiss francs
<EURCHF=>.
(Additional reporting by Nick Olivari in New York; Editing by
Leslie Adler)
