FOREX-Euro soars as Trichet signals April rate hike

* Euro set to test $1.40; analysts caution profit-taking

* Trichet says to exercise ‘strong vigilance’ on inflation

* U.S. nonfarm payrolls report on Friday in focus
(Adds details, updates prices)

NEW YORK, March 3 (Reuters) – The euro gained against the
U.S. dollar to a fresh four-month high on Thursday, edging
toward the psychologically important $1.40 level, after
European Central Bank President Jean-Claude Trichet cemented
expectations of a near-term interest rate rise.

In a press conference after the ECB left its benchmark rate
at 1.0 percent, Trichet said the bank will exercise “strong
vigilance” over rising inflation, a phrase that in the past
signaled a rate rise was only a month away. For more see
[ID:nLOOKCBANK].

“The market was expecting hawkish comments, but I think the
opening up of the door to a hike as early as the next meeting
is what’s really propagated this, so you’re seeing the euro
appreciate across the board,” said Firas Askari, head of FX
trading at BMO Capital Markets in Toronto.

“How sustainable this is is really a question mark. He did
say he’s not expecting a series of rate hikes,” he added. “I’m
not a long-term buyer of the euro.”

The euro climbed as high as $1.3976 (EUR=EBS: Quote, Profile, Research) on trading
platform EBS, its strongest level since early November, after
rising above resistance around its 200-week moving average at
$1.3958. It last traded at $1.3937, up 0.5 percent on the day.

Analysts said the euro is set to remain supported ahead of
the ECB’s next meeting in early April but they added that the
currency is likely to run into strong resistance in the $1.40
area and a rise above could attract fresh selling interest.

“I’m very alert right now for some potential
profit-taking,” said Brian Dolan, chief currency strategist at
Forex.com in Bedminster in New Jersey.

Dolan added that Trichet’s comments that the ECB would
carry on providing unlimited funding at its three-month
operations for the next three months also suggests “there’s
ongoing fragility in the European banking sector.”

A rise in interest rates would push up borrowing costs
across the 17-country euro zone, increasing the cost of funding
for highly indebted countries. [ID:nLDE7221GC]

Askari said it seems clear that the concern about inflation
in Germany, France, Austria and the Netherlands outweighs any
worries in Trichet’s mind about Spain, Portugal, Ireland and
Greece.

“When you look at the relative size of the economies, it
seems that he’s making a call on the overall economic value of
Europe,” Askari said.

FED LAGGING

The strong indication that a rise will come in April put
the ECB in pole position to hike well before the U.S. Federal
Reserve and even the Bank of England, which analysts had
expected to move first.

The euro jumped as high as 114.98 yen on EBS (EURJPY=EBS: Quote, Profile, Research),
also the highest since early November. It also rose 0.9 percent
to 85.73 pence (EURGBP=D4: Quote, Profile, Research) and was up 1.5 percent at 1.2994
Swiss francs (EURCHF=EBS: Quote, Profile, Research).

The dollar rose 0.7 percent to 82.46 yen (JPY=EBS: Quote, Profile, Research), getting
a lift after data showed new U.S. claims for unemployment
benefits fell last week to their lowest level in more than
2-1/2 years. A separate report showed the U.S. services sector
grew at a slightly faster pace in February to another five-year
high. [ID:nOAT004756] and [ID:nLDE7221Z9]

Some traders said the dollar could gain if U.S. nonfarm
payrolls data for February, due on Friday, comes in stronger
than expected, though the move is unlikely to gain traction as
the Fed remains committed to its stimulative monetary policy.

“The bottom line is that two out of the three major central
banks will soon start normalizing monetary policy,” said
Vasileios Gkionakis, macro strategist at Fulcrum Asset
Management LLP in London, which oversees $900 million in
assets. “With the Fed still firm on keeping rates low for long,
all this is likely to keep weighing on the U.S. dollar.”
(Reporting by Nick Olivari and Wanfeng Zhou; Editing by James
Dalgleish)