FOREX-Euro rises on rate expectations, month-end demand

* Euro zone flash inflation rises 2.6 percent year-on-year

* Euro firms broadly as interest rates expected to rise

* Month-end demand helps euro, Irish stress test results due

(Recasts, adds quote, detail)

By Neal Armstrong

LONDON, March 31 (Reuters) – The euro rose broadly on
Thursday as above-forecast euro zone inflation cemented the case
for gradual rate rises from the European Central Bank, though
analysts cautioned against a rapid rise in the currency.

Traders said significant quarter-end and fiscal year-end
flows were helping to boost the euro, at the particular expense
of the greenback.

Eurostat estimated that consumer prices in the 17 countries
using the euro jumped 2.6 percent year-on-year in March, up from
2.4 percent in February. Economists polled by Reuters had
expected 2.3 percent.

European Central Bank Executive Board member Lorenzo Bini
Smaghi on Wednesday implied that the central bank’s policy is to
gradually raise interest rates, with markets expecting the
tightening cycle to begin in April. [ID:nLDE72T1ZS]

“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.”

Ireland later on Thursday announces the results of stress
tests that are expected to signal the effective nationalisation
of the entire financial system.

Tests are expected to reveal an additional 20-25 billion
euro hole in Irish banks’ capital and will be followed by a
radical restructuring of the sector, the Irish Independent
newspaper reported. [ID:nLDE72U0H9]

“Ireland is not a big risk to the euro as there is no
systemic risk thanks to the euro zone rescue fund. Confidence is
being driven by the larger euro zone countries,” said Manuel
Oliveri, currency analyst at UBS in Zurich.

The euro rose 0.6 percent against the dollar (EUR=: Quote, Profile, Research) to
$1.4220, coming within sight of its 2011 high of $1.4249.
Traders said a break of option barriers at $1.4250 would be
needed for further momentum on the upside.

The single currency hit a 10-month high versus the yen
(EURJPY=R: Quote, Profile, Research) around 117.85.

Anticipation that Japan would buck the global tightening
cycle and leave interest rates low to support its quake-hit
economy is encouraging players to sell the yen to fund
higher-yielding investments, in a revival of the carry trade
that flourished before the credit crisis began in 2007.

“Rate differentials are playing a big role, especially as
there is no probability for the BOJ to become more hawkish, even
in the medium- to long-term,” said Oliveri.

“There is scope for rate expectations to stay supported in
the euro zone. German demand and the service sector is strong so
price rises are likely to become domestically driven, not just
commodity driven.”

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.

The dollar was up around 9 percent from its record low of
76.25 yen set on March 17 before G7 central banks intervened in
a rare coordinated move to stem the yen’s rise. It was last at
82.85, unchanged on the day.

The Australian dollar hit a fresh 29-year high of $1.0348
(AUD=D4: Quote, Profile, Research) after favourable retail sales and credit growth data.

The dollar index fell around 0.5 percent to 75.747 (.DXY: Quote, Profile, Research),
dented by month-end selling and the broad rise in the euro.

(Editing by Stephen Nisbet/Toby Chopra)

FOREX-Euro rises on rate expectations, month-end demand