* Euro rally pauses, but on track for best week in 20 months
* Nikkei slips from 8-month peak
* Copper and oil also soften
(Updates prices)
By Ian Chua
SYDNEY, Jan 14 (Reuters) - The euro paused on Friday but
was still on track to post its best weekly performance against
the dollar in 20 months, while Asian equity markets struggled
to extend recent gains, with Japan's Nikkei retreating from an
8-month peak.
European shares were expected to open lower with financial
spreadbetters calling for declines of up to 0.5 percent.
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The common currency fell prey to profit taking, having
raced to a high of $1.3383 on Thursday after the
European Central Bank caught markets off guard by hinting it
could lift interest rates to contain inflation, even while the
bloc was tackling a debt crisis. It was last at $1.3338,
slightly below late U.S. levels.
The hawkish comments followed interest rate hikes in
Thailand and South Korea this week as policymakers grow
increasingly worried about inflationary pressures.
"The signals from the ECB also reinforce our view that it
will hike before the Fed does," said Ken Wattret, BNP Paribas
chief eurogroup market economist.
"As relatively little in the way of rate hikes has been
priced in for this year, the market is likely to continue to
shift in the direction of early tightening, absent a
resurgence in market volatility."
The euro's rise marked an impressive turnaround from a
four-month low around $1.2871 on Monday and set the scene for
a retest of the December high of $1.3500. It is up about 3.5
percent this week, the biggest weekly rise since May 2009.
Well-received bond sales from highly indebted euro zone
members Portugal and Spain this week and speculation that
European policymakers will boost their war chest against
attacks on euro zone sovereign debt all contributed to the
currency's better tone.
Gains in the euro saw the dollar index , which
tracks the greenback's performance against a basket of major
currencies, fall below 80.000 from this week's high of 81.313.
Tsutomu Soma, manager of foreign securities at Okasan
Securities, said the euro's rise was nothing more than
short-covering from overselling late last year on excessively
bearish view on the euro zone.
"Given that the fiscal problems in the region are
unresolved, investors will be cautious about chasing the
currency higher."
NIKKEI FALLS
Equity investors booked profits on recent gains ahead of
the weekend, with stocks of resource companies like BHP
Billiton further weighed by a pullback in oil and
metals prices.
Japan's Nikkei average shed 0.9 percent, a day
after reaching an eight-month high, while stocks elsewhere in
Asia were flat.
Australia's S&P/ASX 200 index nudged up 0.1
percent and Hong Kong's Hang Seng index put on 0.2
percent.
China's Shanghai Composite Index fell nearly 1
percent on speculation of further policy action, which often
emerges on Fridays as the central bank tends to announce its
decisions at the weekend.
"This worry has led the index down and banking shares are
affected," said Cao Xuefeng, head of research at Huaxi
Securities in Chengdu.
"But we think the possibility of policy tightening is
relatively small ahead of key data (due on Jan. 20)."
Copper fell 0.3 percent to $9.585 per tonne, while
U.S. crude <CLc1> was 0.3 percent lower at around $91 a barrel.
(Additional reporting by Chikako Mogi and Hideyuki Sano in
Tokyo, and Chen Yixin in Shanghai; Editing by Kim Coghill)
