FOREX-Euro slips; market nervous on ECB rate path

* Euro slips from 14-mth high vs dlr, 11-mth high vs yen

* ECB widely expected to raise interest rates by 0.25 pct

* Market fears scaling back of future rate rise chances

(Adds quote, graphic, detail)

By Neal Armstrong

LONDON, April 7 (Reuters) – The euro slipped from
multi-month highs on Thursday as the market nervously awaited a
widely expected euro zone rate rise, fearing the ECB could
dampen expectations for further monetary tightening this year.

The European Central Bank is set to raise its benchmark rate
for the first time since July 2008, by 25 basis points, in an
announcement due at 1145 GMT. Portugal’s request on Wednesday
for a European bailout has not changed the view the ECB would
follow up with more interest rate hikes.

Analysts, however, say the euro could weaken if ECB
President Jean-Claude Trichet, at a press conference at 1230
GMT, does not sound hawkish enough to keep alive expectations
for another two rate hikes by year-end.

The tone of Trichet’s introductory statement at the news
conference is likely to be crucial after last month’s reference
to “strong vigilance” regarding price pressures was widely
interpreted as signalling a rate hike was imminent. The single
currency has risen more than 3 percent since Trichet’s comments
on March 3.

He will need to make reference to “close monitoring” of
price pressures in his remarks on Thursday to signal further
rate rises are likely later in the year.

“The market is generally expecting him to refer to “close
monitoring” which would probably be the signal for the next hike
in June. This would be net neutral for the euro,” said Stephen
Gallo, head of market analysis at Schneider Foreign Exchange.

The euro was down 0.4 percent on the day at the day’s lows
around $1.4272 (EUR=: Quote, Profile, Research), having risen to $1.4350 on Wednesday, its
highest since late January 2010. Options traders noted demand
for short-term upside strikes in the $1.4400 region, as market
players looked to protect against a further rise in the euro.

“The market is fully expecting Trichet to remain (hawkish)
so one would surmise the risk is for a correction lower in the
euro,” said a London-based trader, who reported strong interest
to sell the euro against the dollar at $1.4350 and versus the
yen in the 122.50 area.

“I would rather bet on the downside, $1.4200 can easily be
reached,” said Lutz Karpowitz, currency analyst at Commerzbank.
There was a risk euro bulls could be disappointed by what he
thought would be neutral comments from Trichet, he said.


Click [ID:nLDE7351YJ] to see fx trade ideas for ECB decision

ECB in graphics:

The euro zone’s debt struggle:



Portugal became the third euro zone member to seek a bailout
from the European Union, with the size of the package expected
to be up to 80 billion euro ($114 billion). [ID:nLDE7350HL]

Fears that Spain may be the next on the market’s radar for
its debt problems were eased after Madrid comfortably sold 4.1
billion euros of a new three-year coupon bond at an average
yield of 3.568 percent.

Spain will not follow ailing neighbour Portugal in seeking a
European bailout, Spain’s Economy Minister said on Thursday,
hoping Lisbon’s move will draw a line under Europe’s debt
crisis. [ID:nLDE7360A2]

Expectations for higher euro zone rates contrasted with
uncertainty in the United States over when the Federal Reserve
may begin to tighten policy. The U.S. economy remains too
fragile for the Fed to begin raising rates, Atlanta Fed
President Dennis Lockhart said on Wednesday. [ID:nN06207079]

The dollar was up 0.2 percent at 75.649 (.DXY: Quote, Profile, Research) against a
basket of currencies.

The Bank of Japan kept monetary policy steady on Thursday as
expected and signalled its readiness to ease policy further,
bucking a global trend of central banks withdrawing excess
liquidity put in place during the financial crisis.

The dollar rose to a six-month high of 85.54 yen in Asia,
almost 10 yen above its record low of 76.25 yen hit in March,
days after Japan’s devastating earthquake. It slipped back to
trade around 85.10 yen in European dealing.

The euro was down 0.8 percent at 121.51 yen (EURJPY=R: Quote, Profile, Research) after
hitting an 11-month peak above 122.50 on Wednesday.

The Australian dollar scaled a fresh 29-year peak against
the greenback of $1.0489 (AUD=D4: Quote, Profile, Research) before running into options
selling. It was aided by data showing the Australian economy
added a higher-than-expected 37,800 jobs in March.
(Additional reporting by Brenda Goh, editing by Toby Chopra and
Susan Fenton)

FOREX-Euro slips; market nervous on ECB rate path