* Euro climbs vs dollar, dollar gains pause
* Euro recovers from slide after German industrial data
* Investors reassess possibility of U.S. interest rate rise
(Adds comment, updates throughout)
By Harpreet Bhal
LONDON, June 9 (Reuters) - The dollar fell on Tuesday,
pausing for breath following gains in the past few days as
investors assessed the likelihood of an earlier-than-expected
interest rate hike in the United States.
The euro climbed, reversing losses suffered after an
unexpected fall in German industrial output. The data initially
sparked selling in the euro, pushing it roughly to the day's low
as it added to the view that the euro zone's biggest economy
remains weak.
But the euro recovered to hit the day's high, with some
analysts citing rising share prices boosting demand for risky
trades. European shares <> traded half a percent higher by
1225 GMT.
The dollar had climbed after optimistic U.S. jobs data late
last week stoked the view that U.S. rates may rise from roughly
zero at the end of 2009.
But its rally had fizzled by Tuesday as a lack of major
economic data or events left traders with few reasons to push
the dollar higher.
Analysts said the dollar's move in the past few sessions
suggested that monetary policy issues may become a driver of
currency movements in the near future, after market participants
have focussed on risk appetite for much of the year.
"The dollar's general trend was to weaken on strong data
(but U.S.) payroll figures on Friday saw a reverse of that,"
Steve Barrow, head of G10 FX research at Standard Bank said.
"The market may think that is a sign that markets will focus
back on prospects of monetary policy rather than prospects for
stock markets as a consequence of economic data," he said.
Traders said they were focusing on economic indicators and
auctions for U.S. debt later this week to gauge whether a shift
towards a dollar-positive trend will take hold.
A rise in sterling also added to downward pressure to the
dollar, as house prices in England and Wales in the three-months
to May fell at their slowest annual pace in 1-1/2 years.
Sterling <GBP=D4> rose 0.7 percent to $1.6172 <GBP=> as
traders drew relief as the political storm engulfing UK Prime
Minister Gordon Brown appears to have calmed for now.
The euro <EUR=> traded 0.6 percent higher at $1.3987,
recovering from lows hit after data showed German industrial
output fell by 1.9 percent month-on-month in April.
Despite the data, which was much weaker than economists'
expectations for a 0.1 percent rise [], the euro
recouped some of its losses made on Monday when Standard &
Poor's downgraded its sovereign rating on Ireland.
Still, the possibility of more Irish downgrades remained,
with ratings agency Moody's saying on Tuesday it was concerned
about Ireland and would conclude the review of its AAA rating
after a visit to Dublin in the coming weeks [].
Some in the market said that the view that Latvia may not
have to devalue its currency to deal with extreme economic
weakness also provided some support to the euro.
U.S. RATES
The U.S. dollar <.DXY> fell 0.5 percent against a basket of
currencies to 80.428, below 81.466 hit on Monday for the first
time since May 20.
The dollar <JPY=> fell 0.4 against the yen to 98.05 yen.
Data last week showed the pace of U.S. job losses slowed
sharply in May, sparking talk that the Federal Reserve may raise
rates later this year and boosting the dollar. []
On Friday, U.S. short-term interest rate futures, which
track market expectations for Fed rate policy, had their first
meaningful move in months -- bringing forward the possible
timing of a Fed rate hike to late 2009 from early 2010.
U.S. two-year Treasury note yields stood at 1.350 percent
<US2YT=RR> on Tuesday, after rising above 1.4 percent on Monday
for the first time in seven months.
Some analysts were unconvinced that speculation of higher
rates will heat up even more, arguing that a rise in inflation
risks is unlikely this year given that the global economy
continues to struggle. Some said it may therefore be premature
to reward currencies on rate rise expectations.
"Yes, the deterioration in U.S. data has slowed, but to
suggest that this automatically extrapolates the view that the
Fed is looking to take back some monetary easing before year end
is somewhat injudicious," said Jeremy Stretch, strategist at
Rabobank in London.
"It's safe to say that market is getting ahead of itself."
(Additional reporting by Naomi Tajitsu; Editing by Victoria
Main)
