FOREX-Dollar slips vs euro as ECB rate clues awaited

TOKYO - The dollar slipped from six-week highs against the euro on Thursday as investors trimmed positions and waited for clues from European Central Bank President Jean-Claude Trichet on whether interest rates could rise further in February.

The ECB is widely seen holding rates steady at 3.5 percent at its policy meeting later in the session, but many are looking for another rate increase in the first quarter and possibly as soon as next month.

Market players will look to see if Trichet uses the word "vigilance" to describe the ECB's policy stance, his previous signal of a pending rate increase, at his post-meeting news conference starting at 1330 GMT.

"Investors would like to see some hawkishness from Trichet," said Sharada Selvanathan, currency strategist at BNP Paribas in Singapore.

"I don't think the dollar support is going to wane so quickly, so a euro/dollar move higher will very much depend on what Trichet says.

The U.S. currency jumped on Wednesday after data showed the country's trade deficit unexpectedly shrank to $58.2 billion in November, the smallest since July 2005.

Combined with receding expectations for a Federal Reserve rate reduction this year that would erode the dollar's yield advantage, the U.S. currency has rebounded from its roughly 10 percent slide against the euro in 2006.

The Bank of England also wraps up a two-day policy meeting on Thursday and is seen leaving rates steady at 5.0 percent.

The dollar rose to 119.78 yen from near 119.65 yen in late New York trade.

Traders said Japanese exporters and other market players have large orders to sell the U.S. currency lined up towards 120 yen.

Offsetting those flows, investors were buying options betting on a weaker yen around the 120 yen level as a way of hedging their exposure to yen assets such as stocks.

The dollar rose as high as 119.88 yen last year and is approaching the 2005 peak of 121.40 yen, the highest for the U.S. currency since March 2003.

The euro climbed to $1.2957 after falling as low as $1.2931 in the previous session, its weakest since Nov. 23.

Against the yen, the single European currency gained 0.25 percent to 155.15 yen , clawing back towards the all-time high of 158.06 yen struck earlier this month.

The market showed little initial reaction to the yuan strengthening beyond parity with the Hong Kong dollar's rate of 7.8 to the U.S. dollar for the first time. The yuan climbed to a peak of 7.7953 per U.S. dollar .

"The move is nothing more than numerical, and talk of a break of the HKD-USD peg in favour of monetary union with the Chinese yuan will not be fulfilled for at least several years," Sue Trinh, senior currency strategist at RBC Capital Markets in Sydney, said in a note to clients.

AUSTRALIA JOBS SURPRISE

The Australian dollar jumped nearly 1 percent against the U.S. dollar after data showed that companies added a whopping 44,600 jobs in December, triple forecasts, paving the way for the country's central bank to lift rates as soon as February.

The Aussie jumped to a high of $0.7830, recovering from a six-week low of $0.7760, before easing back to $0.7815 .

The Aussie and other high-yield currencies took a beating last week and earlier this week as a slide in commodities, oil and emerging market stocks prompted investors to trim back risky positions, such as carry trades.

Wide-ranging market players have borrowed the low-yielding yen and used the funds to buy higher-yielding currencies and assets, with the Bank of Japan seen only lifting rates slowly.

"Even if the BOJ raises interest rates next week, it will take several more months until the next rate hike, so the yen will remain a weak currency due to existing yield differentials," said a dealer at a Japanese trust bank.

The BOJ could raise interest rates to 0.5 percent at its Jan. 17-18 meeting, which would be the highest level since 1995 but still well below those of other currencies.