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Dollar Drops Vs. Euro as Trichet Signals Rate Hike 

The euro rebounded from three-week lows against the dollar Thursday after European Central Bank President Jean-Claude Trichet said euro-zone interest rates could rise as early as next month.

Speaking after the ECB left rates unchanged at 4.0 percent, Trichet said it was possible the bank could raise rates in July, which would increase the attractiveness of euro zone assets and the currency.

"Trichet today has spoken openly about the possibility of raising rates next month.

This is a very overt bias to tighten," said Alan Ruskin, chief international strategist, at RBS Global Banking and Markets in Greenwich, Connecticut.

The ECB chief also cited rising inflation risks in the euro zone due to high food and energy costs.

The euro gained about 1 percent versus the dollar, recovering from three-week troughs of $1.5366.

Against the yen, the euro surged even more than it did against the greenback, posting its largest daily rise in about two and a half months. The dollar gained against the yen as well.

Trichet's stance on interest rates was echoed by ECB Governing Council member Axel Weber, who said on Thursday that the bank needs to act on inflation.

"We have got to follow words with deeds ... That is today's signal," said Weber.

Some analysts, however, were skeptical that the ECB would actually raise interest rates as recent data showed signs the region's economy was slowing.

Earlier in the session, the euro had slipped after an unexpected fall in German manufacturing orders.

"We think rate hikes by the ECB are not guaranteed at this point as growth data continues to point to a weakening pace of activity," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.

Losses in the dollar versus the euro were compounded by data on Thursday that showed U.S. mortgage delinquencies and foreclosures rose to record highs in the first quarter.

The dollar rose to three-month highs against the yen , bolstered by a view that the U.S. economy was in much better shape than many initially thought.

That should enable the Federal Reserve to keep U.S. target interest rates on hold this year and prevent the deterioration of the dollar's appeal to global investors.

The latest data on U.S. jobless claims affirmed this rate view.

Data showed that initial claims for state unemployment insurance benefits fell to a six-week low.

Richmond Fed President Jeffrey Lacker reinforced the market's improving view on the United States, saying on Thursday that the economy could avoid a severe downturn, but faces uncomfortable levels of inflation.

The pound fell to a two-week low against the dollar at $1.9464 after the Halifax UK House Price Index fell more than expected in May, showing more evidence that the UK housing market is deteriorating.

Sterling also gained against the dollar. The Bank of England earlier kept rates unchanged at 5 percent, in line with market expectations.

Having opted not to cut rates this month, analysts said the BoE also faces the task of trying to balance a slowing economy and rising inflation, which is keeping it from further easing monetary policy.

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