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Dollar Rises Against Euro on Dovish ECB Comments

Fading prospects of a rate cut by the Fed and no signs from the European Central Bank that it would continue to tighten monetary policy beyond 2007 lifted the dollar against the euro.

The euro slipped below $1.3500 to a session low of $1.3497, down 0.2% from late Tuesday. The euro fell 0.5% against the yen to 163.36, a session low, from 164.16 late Tuesday in New York.

"We are getting toward the point where (interest rates) are neutral, so there's no additional impetus there for the euro to gain on the back on that," said Shaun Osborne, senior currency strategist at TD Securities in Toronto.

The dollar's strength against the euro prompted gold investors to take some profits from the precious metal's rise to a three-week high Tuesday. COMEX gold for August delivery fell $2.20 to $672.90 an ounce.

Earlier, the ECB lifted euro-zone rates to 4%, but the hike had been well telegraphed and failed to boost the euro, which has been trending higher along with European interest rates over the last year.

While ECB President Jean-Claude Trichet said liquidity remains ample and inflation risks remain tilted to the upside, he added the ECB does not intend to alter its 2008 inflation forecast.

By holding that forecast steady at a midpoint of 2%, "the ECB has chosen not to send a hawkish signal," said Divyang Shah, strategist at Commonwealth Bank of Australia in London.

Euribor contracts rallied across the 2008 part of the curve after Trichet's remarks, with the chances of euro-zone rates hitting 4.5% by March falling to around 60%, from 80% a day ago.

"We are getting toward the point where (interest rates) are neutral, so there's no additional impetus there for the euro to gain on the back on that," said Shaun Osborne, senior currency strategist at TD Securities in Toronto.

The euro is nearly two cents from a record high above $1.3680 hit in April.

"It seems the ECB is going to hold off for a while, and the euro will have a tough time getting through $1.36 again soon," said David Hilgeman, an analyst at optionsXpress in Chicago.

At 4%, euro-zone interest rates are at their highest level in nearly six years and are double what they were 18 months ago, when the ECB began its current tightening cycle.

Yen Rises As Stocks Slide

Against the yen , though, the dollar declined 0.3 percent to 121.04 from 121.38 the previous day.

Equity weakness prompted investors to unwind trades financed by borrowing yen at low Japanese interest rates, a strategy known as the carry trade.

But Tim Mazanec, senior currency strategist at Investors Bank & Trust in Boston, said market players probably shouldn't expect liquidity to dry up and global interest rates to start falling just yet.

Investors in interest rate futures have nearly priced out any chance of the Federal Reserve cutting rates this year after data has pointed to surprising strength in the U.S. economy.

European rates may also be headed higher than the market expects, Mazanec said.

"Trichet knows that when they've hit levels above 4% in the past, the economy has slowed, but you look elsewhere around the world and that's not happening this time," he said. "Australia, New Zealand -- they're not slowing."

The Australian dollar surged earlier to a 17-year peak against the U.S. currency after higher-than-expected first-quarter growth data suggested Australian interest rates, now at 6.25%, could be headed higher.

The New Zealand dollar also hit its strongest level against the greenback since being floated in 1985.

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