* Euro retreats below $1.38 as traders book profits
* Dollar remains sluggish, Fed seen on hold indefinitely
* Trading volume seen on light side due to winter storms
(Updates prices, adds detail, changes byline)
By Wanfeng Zhou
NEW YORK, Feb 2 (Reuters) - The euro fell from a
2-1/2-month high against the dollar on Wednesday as tensions in
Egypt escalated, though the single currency's uptrend stayed
intact amid signs of rising inflation in the euro zone.
The euro climbed above $1.3860 overnight, its best level
since early November, before retreating after a German
government official said Berlin opposed allowing a euro zone
rescue fund to buy troubled countries' debt. []
Traders said winter storms in the Midwest and Northeast
were keeping trading ranks thin, while clashes in Egypt between
supporters and opponents of President Hosni Mubarak injected
some uncertainty into markets. []
The dollar and Swiss franc, usual beneficiaries of
safe-haven buying, were only modestly bid, and traders said the
euro remains on track to test $1.40. An upside target before
that was seen at $1.3950, around the 200-week moving average.
"Unless you see a big contagion effect in the rest of the
Middle East, the euro is going to continue a little bit further
up," said Fabian Eliasson, vice president of currency sales at
Mizuho Corporate Bank in New York.
The euro last fell 0.4 percent at $1.3781, after having
risen as high as $1.3862 <EUR=EBS> on trading platform EBS.
"There's a bit of a flare-up in Egypt and some of our
barometers suggest a hint of renewed risk aversion, but I don't
think it will dissuade investment in high-yield assets," said
BNY Mellon strategist Michael Woolfolk. "And given how far the
euro has come, you would expect to see some profit-taking."
Sources say the euro zone is giving serious consideration
to letting its rescue fund buy debt from distressed countries,
though the German position was unclear []
The European Central Bank meets on Thursday and investors
will scrutinize comments from from President Jean-Claude
Trichet for clues about the bank's stance on inflation.
The euro has gained nearly 3 percent since the ECB's last
meeting, when Trichet's comments on short-term inflation
pressures fueled expectations the European Central Bank will
lift interest rates sooner than the Federal Reserve.
Dollar gains against major currencies were slight despite
data showing U.S. private employers beat expectations and added
187,000 new jobs last month. []
Traders said a downward revision to last month's data
tempered enthusiasm and failed to alter investors' conviction
that U.S. interest rates will remain low indefinitely.
The dollar was last up 0.4 percent at 81.66 yen <JPY=> and
up 0.9 percent at 0.9434 Swiss francs <CHF=>.
While U.S. data has improved -- a survey this week showed
manufacturing grew in January at its fastest pace since 2004 --
the Fed remains committed to stimulative monetary policy. An
official said another round of bond purchases could even be
discussed if economic recovery starts to flag. []
ING analysts argue the two-year euro swap rate <EURAB6E2Y=>
at which corporates hedge interest rate risk has limited room
to extend gains. It has pushed above 2 percent, 100 basis
points over the policy rate, which ING says is "extreme."
"The euro may have come about as far as it can on the ECB
story alone, and will need an alternative catalyst to punch it
through resistance in the $1.39-1.40 area," ING analyst Chris
Turner said in a note.
(Additional reporting by Steven C. Johnson; Editing by Diane
Craft)
