LONDON: The euro hit a four-month high against the dollar on Friday on expectations euro zone interest rates may rise next month, while investors waited to see if an expected improvement in US jobs data would offer respite to the US currency.
The euro edged up to $1.3977 on electronic trading platform EBS a day after European Central Bank President Jean-Claude Trichet stunned investors by saying a rate rise in April was a possibility in its drive to fight inflation risks.
Further gains were capped for the moment, with traders citing offers to sell the single currency looming above $1.40, a psychologically key level.
Still, analysts said the euro was poised for a move higher as the ECB's announcement, which fortified the view the ECB will raise rates well before the US Federal Reserve, had widened the gap between euro zone and US government bond yields.
Analysts eyed US yields to determine the dollar's move on US payrolls due at 1330 GMT. The central forecast in a Reuters poll is for 185,000 new jobs to have been added to the economy last month, after an addition of 36,000 in January.
"We should see a better non-farm payrolls figure, but if US yields don't rise, it won't help the dollar," said Marcus Hettinger, global FX strategist at Credit Suisse in Zurich.
"Interest rate differentials ... are playing in favour for the euro, so we could see a break above $1.40 any time now."
At the same time, Paul Robinson, head of European FX Research at Barclays Capital, said dollar risks were skewed to the downside heading into payrolls and that the US currency could face more selling than usual if the figure comes in weak.
"What makes today's nonfarm payrolls data more interesting is the very different views of the world held by the ECB and Federal Reserve," he said.
ECB rate speculation has pushed yields on two-year German government bonds the maturity most sensitive to official rate moves -- roughly a full percentage point higher than those of their US counterparts this week. The spread between the two is now at its widest since January 2009.
Euro interest rate swaps soared across the curve with the two-year rate hitting around 2.33 percent, highs not seen since early 2009.
While rate speculation has boosted the euro, some analysts pointed out the dangers of tightening policy when the economies of some euro zone countries are suffering from debt problems.
By 1053 GMT, the euro pulled back to $1.3965, little changed on the day, having risen as high as $1.3976 on Thursday, and hovering above its 200-week moving average around $1.3957.
A weekly close above that would pave the way for a move higher, although some near-term resistance was seen around $1.3980, the 78.6 percent retracement of the euro's down move from November.
BUY ON DIPS
Market participants acknowledged the euro may stumble if European officials fail to reach a consensus on a lasting solution to euro zone debt problems when they meet this month.
But some forex managers said they would be happy to pick up the single currency if it dips on such concerns, as they were confident that political differences within the region were unlikely to derail overall stability.
"We like the euro," said Thanos Papasavvas, head of currency management at Investec, arguing that even the economies of some weaker euro zone countries were starting to improve, while Europe would eventually hammer out a permanent debt rescue plan.
He added: "We would be interested in increasing our euro positions more on any correction to $1.34-35."
Positive euro momentum pushed the single currency as high as 115.43 yen, its strongest since early November.
But the shared currency slipped 0.3 percent on the day to 1.2967 Swiss francs, which rallied after Swiss National Bank Vice Chairman Thomas Jordan said rates in the country will have to rise in the medium term.
The dollar inched up to 82.55 yen, but was at 76.500 against a currency basket, little changed on the day and hovering near a four-month low hit on Thursday.
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