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Euro Touches Two-Year High Against Dollar On Rate Expectations

The dollar edged up against the euro on Friday, after touching a two-year low overnight, helped by ralling U.S. stock prices and dealers evening out their positions before the weekend.

Demand for the dollar in the past couple of days has declined amid expectations for strong economic growth in Europe and the outlook for interest-rate increases in the region.

"It's Friday and people who had gone short the dollar are squaring up now," said Greg Anderson, senior currency strategist at ABN Amro in Chicago.

The euro rose as high as $1.3637, approaching the record high of $1.3670 set in December 2004, before reversing course to stand at $1.3594 in midmorning trading in New York as U.S. benchmark indexes rallied.

The European currency also rose against the yen, or 0.2% to 161.50 yen, having hit a record peak of 162.42 this week.

The dollar was up 0.4% at 118.87 yen.

Still, traders said the euro is likely to resume its advance amid signs that European politicians may not take action in the near term to prevent it from strengthening, traders said.

"The euro is definitely going to keep strong," said Mike Kaizer, a senior currency trader at M&T Bank in Buffalo, New York. "We are in some sort of 'green-light' zone in regards to the euro. The feeling is that officials won't put a brake to the currency's gains, at least for now."

Kaiser at M&T Bank said that a euro/dollar close above $1.3600 on Friday, would pave the way for another push to the all-time high early next week.

The euro has also been boosted by prospects of narrowing interest rate differentials with the United States as the region's robust growth and inflation pressures will probably prompt the European Central Bank to raise rates again in June.

In contrast, the Federal Reserve is widely expected to cut rates at least once this year, from 5.25%.

At the same time, the absence of visible policy-maker opposition to a strong euro has also contributed to the currency's gains. Eurogroup chairman Jean-Claude Juncker and other finance ministers said on Friday the euro's strength was no reason to panic.

"The fact that we haven't heard anything from European politicians, that in itself is encouraging news for the euro," said Adarsh Sinha, currency strategist at Barclays Capital.

"Everyone believes they (the ECB) will hike rates in June. We think the risks are that they might have to hike rates once again, given the resilience of the euro zone to the higher euro."

With Japanese benchmark interest rates at just 0.5%, and seen rising only very gradually, the yen is a favorite funding currency for carry trade investments in higher return units.

Later in the day, investors will tune into comments from U.S. Treasury Secretary Henry Paulson who is due to speak on issues between the United States and China. Federal Reserve Board Governor Frederic Mishkin is also due to speak.

ECB To Hike Despite Strong Euro

The ECB is set to raise interest rates to 4% in June with the risk of another move to 4.25% later this year, according to economists' expectations.

Growth in the euro area is projected at 2.3% in 2007 and 2008, according to the International Monetary Fund. The forecast is higher than a previous estimate by the Fund for a 2.0% growth.

ECB Governing Council member Axel Weber said in a newspaper interview inflation risks exist in the medium term and the ECB must act against them.

Euro zone central bankers and finance ministers, in Berlin for a two-day informal meeting, sounded relatively unconcerned about the euro's exchange rate although Governing Council member Vitor Constancio said the ECB is watching euro strength closely.