FOREX-Euro gains on rate expectations, month-end flows

* Euro zone inflation data seen confirming ECB rate hikes

* Euro firms broadly as interest rates expected to rise

* Mth-end demand helps euro, Irish stress test results due
(Adds quotes, updates prices, changes byline, changes
dateline previous LONDON)

By Julie Haviv

NEW YORK, March 31 (Reuters) – The euro outperformed rival
currencies on Thursday as inflation data firmed expectations
the European Central Bank would raise interest rates, but the
currency’s strength may prove temporary with peripheral debt
issues seen persisting in the second quarter.

Traders said significant quarter-end flows helped boost the
euro at the expense of the dollar in particular.

Official euro zone estimates showed consumer prices jumped
2.6 percent year-on-year in March, up from 2.4 percent in
February and above forecasts. For details, see [ID:nLDE72U14W]

Jens Nordvig, global head of FX strategy at Nomura
Securities in New York. said an ECB rate hike at its next
monetary policy meeting on April 7 was a “done deal.”

Comments from ECB policymaker Lorenzo Bini Smaghi Wednesday
implied the central bank’s policy would gradually raise rates.
Markets see the tightening cycle starting in April.

The euro gained nearly 6 percent against the dollar in the
first quarter, partly on expectations the ECB would raise rates
well before the U.S. Federal Reserve.

“The first quarter we saw a generally weak dollar
environment, an ECB turning hawkish, and the risk premium being
taken out of the euro,” Nordvig said.

The euro briefly pared gains against the dollar after
Reuters quoted sources as saying the ECB would not announce
plans for a new liquidity facility to help Irish banks. The
euro fell to $1.4176 (EUR=: Quote, Profile, Research) from $1.4185 just before the
report. The euro was still up 0.4 percent from the prior New
York close. [ID:nLDE72U1J8]

Most analysts contend Ireland was not a big risk to the
euro since there is no systemic risk due to the euro zone
rescue fund.

In the options market, volatility was generally pressured,
with 1 month EUR/USD (EUR1MO=: Quote, Profile, Research) extending recent 11-month lows
to 9.7 amid sales of 1-week vol from 10.7-10.4.

The euro also hit a 10-month high versus the yen (EURJPY=R: Quote, Profile, Research)
at around 117.90 yen.

“The euro has priced in a lot of good news, so it’s hard to
see it moving rapidly higher. But it can definitely continue on
the upside,” said Raghav Subbarao, currency analyst at Barclays

“The ECB wants to show they are concerned about inflation,
but there are clearly other risks and they have kept the full
allotment of open market operations, given concerns about
financial stability.”

Anticipation that Japan would buck the global tightening
cycle and leave interest rates low to support its quake-hit
economy encouraged players to sell the yen to fund
higher-yielding investments in a revival of the carry trade.

The dollar rose to a three-week high of 83.21 yen (JPY: Quote, Profile, Research)
before running into selling by Japanese banks and foreign
players along with some fiscal year-end yen demand from
Japanese exporters.

Strong offers were seen from 83.30 to 83.50, with more
around 84.00. It last traded at 82.73.

“The yen should trade in the 80-85 range over the near
term, but we should see a break to the upside in the secondquarter,” said Nomura’s Nordvig.

Nordvig recommended six-month dollar calls in dollar/yen.

The Australian dollar hit a fresh 29-year high of $1.0362
(AUD=D4: Quote, Profile, Research) after favorable retail sales and credit growth data.
(Additional reporting by Neal Armstrong in London; editing by
Jeffrey Benkoe)

FOREX-Euro gains on rate expectations, month-end flows