* Euro retreats for second straight day
* Swiss franc stumbles, lower oil trims safe-haven bid
* Analysts see room for short-term euro correction
* Focus shifting toward Fed monetary policy
(Updates prices, adds comment, detail, byline)
By Steven C. Johnson
NEW YORK, March 8 (Reuters) - The dollar rose against the
euro on Tuesday amid fear that some euro zone states won't be
able to withstand higher interest rates, though further gains
will likely require more aggressive Federal Reserve policy.
Tough inflation talk from European Central Bank (ECB)
President Jean-Claude Trichet last week had pushed the euro
above $1.40, but recent credit downgrades for Greece and Spain
reminded investors higher borrowing costs and a stronger
currency would make it more difficult for debt-burdened
countries to boost growth.
"The problem with the interest rate driven trade and
Trichet's hawkish comments is that you have to see the other
issues behind it," said John McCarthy, director of foreign
exchange at ING Capital Markets in New York. "Higher rates will
be devastating on the peripheral countries."
That helped pushed the euro down as low as $1.3860,
extending a retreat from Monday's four-month peak of $1.4036.
It last traded down half a percent at $1.3902 <EUR=EBS>.
"We're seeing continued euro/dollar selling from the real
money community. It feels like the market wants to target
1.3880-1.3850," a London-based trader said.
The dollar also rose 0.6 percent at 82.73 yen <JPY=>.
Whether the greenback can extend gains against the euro
will depend on whether the Fed hints at tighter monetary policy
of its own. U.S. interest rates have been near zero for more
than two years, and the Fed has poured even more money into the
economy via direct purchases of Treasuries.
"Now the focus really shifts to the U.S.," said Paresh
Upadhyaya, head of Americas G10 FX Strategy at BofA Merrill
Lynch. "The Fed has sounded more hawkish lately, but will they
continue to do so, will they start to detail an exit strategy?
That's the big question."
The Fed holds its monthly policy meeting on March 15.
Following a break of the $1.3862 February peak, the next
technical level is $1.3830, the low hit last Thursday before
Trichet's hawkish comments. Then the euro could be heading
toward $1.35, though investors say the euro is still supported
by expectations the ECB may raise interest rates next month.
Euro zone countries are ironing out measures to resolve the
region's debt crisis in time for a European Union summit March
24-25. They will meet at a preliminary summit on Friday, and
any sign leaders are struggling to reach a consensus on a debt
rescue fund could trigger more profit-taking in the euro.
"We have constructive expectations for reform of the EU
financial stability fund. If those aren't realized, we could
see negativity on the euro in the short term," said Carl
Hammer, currency strategist at SEB in Stockholm.
Analysts at Credit Agricole said a lack of consensus later
this month could trigger selling in the euro. It expects the
single currency to trade at $1.27 by May.
Any sign the Fed is moving toward tighter policy should
also boost the dollar against the yen, Upadhyaya said, though
further unrest in Libya and elsewhere in the Middle East would
push up oil prices further and limit dollar gains.
Oil prices <LCOc1> stabilized on Tuesday after Kuwait's oil
minister said OPEC was in talks to boost oil production,
although concerns remained about possible further supply
disruptions due to unrest in the Middle East and North Africa.
An early slide in oil encouraged investors to sell the
Swiss franc, which has gained broadly from safe-haven buying
throughout the political uprising in Libya. For details, see
[]
The euro <EURCHF=EBS> traded at 1.3003 francs, having hit a
two-week high of 1.3041 francs on EBS.
(Additional reporting by Nick Olivari in New York; editing by
Jeffrey Benkoe)
