United States - (Recasts, updates prices, adds comment). * Dollar snaps a two-day advance * ECB's Stark reins in extent of ECB rate hike expectations * Euro declines short lived as investors debate ECB outlook NEW YORK, (Reuters) - The dollar fell against the euro Wednesday, snapping its best two-day advance against the single euro zone currency since 2005, with investors debating the relative outlook for interest rates in the United States and Europe given the rhetoric of central bank officials in recent days. Investors expect a euro-zone rate hike as soon as July based on comments from European Central Bank President Jean-Claude Trichet last week. Central bank officials in the past few weeks have cranked up their discussion of rate outlooks, with the Fed also saying it will fight inflation pressures even amid concerns about slowing economic growth. Analysts say the combination of surging prices and struggling economies is making it difficult for markets to gauge the outlook for interest rates and trading could be volatile based on officials' comments in the near term. The euro did touch a session low against the dollar after European Central Bank board member Jeurgen Stark was reported as saying the central bank is not considering a series of rate rises. . The euro then recovered as buyers debated Stark's comments against those made by other ECB officials in recent days. "Looking in to the remarks, Stark went on to say that the markets understood the ECB's signal for July, which suggests that July will see a rate hike, but it may be the only one in the current cycle," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida. The euro traded near session highs, up 0.8 percent, at $1.5582 midway through the New York session, well off the session low of $1.5454 after Stark told Bloomberg News that the ECB will do everything necessary to anchor inflation expectations. Trading was volatile ahead of the Wednesday release of the Fed's Beige Book of regional economic conditions which may indicate the Fed's ability to raise rates is limited in the event of a prolonged U.S. economic slowdown. "It may temper expectations (for a rate hike) as the market digests the entire U.S. economic situation," said Omer Esiner, senior market analyst at Ruesch International in Washington. Declines in the U.S. stock market also weighed on the dollar. RATE RHETORIC Stark's comments came after ECB President Jean-Claude Trichet surprised markets last week when he signaled that a rate increase could come as soon as next month to limit the inflationary impact on the economy from soaring oil prices. Traders took Stark's comments to be softer in tone than those of Dallas Fed President Richard Fisher, who on Tuesday said the U.S central bank would not allow inflation expectations to rise unchecked, echoing comments made by Fed Chairman Ben Bernanke a day earlier. . Such hawkishness pushed the dollar up to 107.75 yen , based on Reuters data in early trading in the global session, its highest level since late February, before it retreated to 106.60, near the session low. The dollar gave back gains as investors debated whether the 2.4 percent gain in the dollar against the yen in the previous two sessions was too far, too fast. Supporting the dollar, Bernanke had said the risk the U.S. economy has entered a substantial downturn has diminished over the past month. This sparked the interest rate futures market to price in as much as 75 basis points of rate hikes by the end of the year . Federal Reserve Vice Chairman Donald Kohn said on Wednesday that a steady rise in energy prices has fueled an inflationary psychology in the United States and could be a problem if it does not reverse. Some analysts said they were surprised by the slew of comments from financial officials in the run-up to the Group of Eight finance ministers meeting later in the week, adding they would be watching to see if currencies will be discussed at the gathering. Japan's Ministry of Finance said currencies may make it on to the agenda when the nation hosts the meeting later this week, while adding the issue was unlikely to be included in the final communique (Reporting by Nick Olivari. Editing by Richard Satran)
Copyright 2008 Reuters.
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