(Updates prices, adds comment, changes dateline, byline)
* Euro hits one-month peak vs dollar
* German Ifo data fans speculation of ECB rate increase
* Fed minutes in focus for clues about US rate outlook
By Steven C. Johnson
NEW YORK, May 21 (Reuters) - The euro vaulted to a
one-month high against the dollar on Wednesday after a surprise
improvement in German business sentiment bolstered the case for
higher euro zone interest rates, which might be needed to fight
inflation.
Both the current conditions and expectations components of
the Ifo business sentiment index rose, adding to euro gains
seen on Tuesday after an adviser to the German government said
he expects the European Central Bank to hike rates this year.
The comments come as oil prices continue to surge to new
highs <CLc1>, increasing Europe's inflation fears and also
denting the U.S. growth outlook and the dollar.
"With oil reaching $130 a barrel, the stronger data adds to
the complications for the ECB," said Camilla Sutton, currency
strategist at Scotia Capital in Toronto. "They are most likely
on hold, but their mandate is price stability, so if inflation
moves higher, they are more likely to hike than to cut."
The euro rose as high as $1.5773 <EUR=> and 80.22 pence
<EURGBP=>, levels not seen since April 24. Against the dollar,
it has since eased to $1.5749, up 0.6 percent on the day.
"The Ifo showed that the ECB is still in a position to make
a move (up in rates) if it needs to do so," said Simon Derrick,
head of currency research at Bank of New York Mellon.
The euro's rally and the rise in oil prices dragged the
dollar down to a one-month low against a basket of six major
currencies, at 71.981 <.DXY>.
The dollar fell 0.2 percent to 103.40 yen <JPY=> and 0.7
percent to 1.0299 Swiss francs <CHF=>. The greenback was down
0.7 percent against its Canadian counterpart at C$0.9848
<CAD=>, with the loonie boosted by high oil prices and a gain
in April Canadian consumer prices.
While Canada's CPI was higher than expected, the country
remains "much better positioned than other major economies,
where inflation is outside the central bank target zone,"
Sutton said.
In contrast to burgeoning speculation of an ECB rate hike,
bets on a Federal Reserve tightening before the end of the year
have faded over the last few days. Fed Vice Chairman Donald
Kohn said on Tuesday that rates appear to be at the right level
for now, though he did stress uncertainty about the future.
Markets will keep an eye on the 2 p.m. (1800 GMT) release
of the minutes from the Fed's April meeting, at which it cut
rates to 2 percent. Officials hinted then that they may move to
the sidelines to allow 3.25 percentage points' worth of rate
cuts since September time to work through the U.S. economy.
Late on Tuesday, U.S. rate futures were pricing in an 82
percent chance of a rate hike by year end, down from around 100
percent before the release of mixed U.S. inflation data.
The ECB has held rates at 4 percent since last June.
Sutton said the market appears to be embracing anew a weak
dollar bias that should persist until a shift in data tilts
interest rate differentials back in the greenback's favor.
Some said that might come from softer euro zone data.
Gabriel Stern, an analyst at Lombard Street Research in London,
said slower global growth will eventually dull the growth
outlook for Germany, the euro zone's largest economy.
Until then, though, the risk that the euro retests its
all-time highs above $1.60 is increasing, particularly if it
breaks the next technical objective at $1.58, according to
Brown Brothers Harriman strategists.
(Additional reporting by Toni Vorobyova; Editing by Chizu
Nomiyama,)
