* Euro hits 3-week lows vs dollar, sterling
* Dollar hits 1-month high vs yen
* Euro zone inflation softer in December
(Recasts, changes byline, dateline; previous LONDON, adds
comment, updates prices)
By Gertrude Chavez-Dreyfuss
NEW YORK, Jan 6 (Reuters) - The U.S. dollar rallied for a
third straight session on Tuesday, boosted by more signs of
economic weakness in the euro zone that could prompt its
central bank to slash interest rates further.
The dollar also continued to benefit from a planned U.S.
stimulus package, with investors betting that this would help
the world's largest economy emerge from its recession more
quickly than most countries.
The euro fell broadly, hitting a three-week low versus the
greenback after a fall in euro zone inflation added fuel to
expectations the European Central Bank will continue cutting
rates. See []. That should diminish the allure of
the single euro zone currency against the dollar.
"It's more of a euro sell-off than a dollar rally and has
something to do with the fact that markets do not believe the
ECB can maintain interest rates above 2 percent for much
longer," said Boris Schlossberg, director of currency research
at GFT Forex in New York.
"On the other hand, the Obama stimulus package has also
helped the dollar. The hope is that the stimulus plan would
enable a quick U.S. economic rebound."
Losses in the euro prompted broad dollar gains, with the
U.S. currency climbing above 94 yen against the Japanese unit,
its highest in more than a month, while the dollar index hit
its highest in three weeks.
In early New York trading, the euro <EUR=> was down 1.5
percent at $1.3397, having fallen as low as $1.3311, its
weakest level since Dec. 12, according to Reuters data.
Against sterling, the single currency fell to 91.00 pence
<EURGBP>, its lowest since Dec. 17. The pair has tumbled
dramatically after hitting a record high of 98.05 pence last
week. It last traded at 91.91 pence, down 0.8 percent on the
day.
WEAK YEN OUTLOOK
The dollar climbed as high as 94.42 yen <JPY=>, its highest
since Dec. 1. It was last at 94.27 yen, up 1 percent.
Analysts cited speculation that Japanese investors are
renewing their foreign investments this year, which should hurt
the yen.
The ICE Futures' dollar index, a gauge of the greenback's
value against a basket of currencies <.DXY>, rose as high as
84.023, its strongest in more than three weeks. The index last
traded at 83.633, up 1.3 percent.
Analysts, however, said given the dollar's sharp gains over
the last few days, the currency may be due for a short-term
pullback.
"Short-term momentum studies are over-extended, suggesting
operators may find it difficult to substantially extend the
dollar's gains scored in Asia and Europe," said Brown Brothers
Harriman in a research note. But the bank expected dollar
buying to resume once the currency gets back to lower levels.
In the euro zone, inflation fell to a 26-month low of 1.6
percent year-on-year from 2.1 percent in November.
The ECB targets inflation at just under 2 percent, and many
in the market think a fall below that level keeps the door open
to more aggressive rate cuts from the current 2.5 percent to
deal with a deteriorating economy.
"(The data) will further free the ECB to cut interest rates
at next week's meeting," said Adam Cole, global head of
currency strategy at RBC in London.
"The balance of news from Europe is so poor that the market
is perceiving that the ECB is behind the curve (on rates),"
which was driving recent weakness in the euro, he said.
The ECB is expected to cut its key lending rate by 50 basis
points or more at its policy meeting next week. In the run-up
to the gathering, ECB officials have been suggested that rates
could come down more in the future.
(Additional reporting by Naomi Tajitsu in London; Editing by
Chizu Nomiyama)
