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By Veronica Brown
LONDON, March 27 (Reuters) - The dollar rose versus the euro on Thursday, but was still heading for the worst quarterly performance since late 2004 as investors weighed economic resilience in the euro zone against a sharp U.S. slowdown.
End-quarter demand gave the dollar some short-term support after two days of steep losses on contrasting U.S. and euro zone data, but analysts remained wary of calling a solid recovery.
"The dollar has stabilised following weakness overnight, but we are still of the view that the dollar as well as the state of the U.S. economy is still not out of the woods yet," Societe Generale currency strategist Phyllis Papadavid said.
"There's a bit of a respite this morning, but the news has not been positive," she added.
U.S. data so far this week has added to the picture of an economy on the edge of recession, with March consumer confidence plunging to a 5-year low, a surprise fall in February durable goods orders and a record drop in home values in January.
In the euro zone, meanwhile, expectations of a near-term interest rate cut have been erased by forecast-beating German and French business confidence surveys and continued hawkish rhetoric from the European Central Bank.
ECB President Jean-Claude Trichet said on Wednesday euro zone rates were at the right level and stressed inflation risks.
The euro <EUR=> was down 0.3 percent on the day at $1.5798, roughly two cents below last week's record highs above $1.59, but still up more than 8 percent this quarter -- on track for its strongest quarterly performance since the last three months of 2004.
French government spokesman Luc Chatel said that too strong a euro can have negative effects on the French economy and that France has made that point to the ECB.
The Chief Executive of EADS (EAD.PA: Quote, Profile, Research), whose Airbus unit faces stiff competition from U.S.-based Boeing, said the strong currency could spark an exodus of European export industries.
However ECB policymakers still seem comfortable with the exchange rate, stressing that excessive FX volatility is a bad thing, but at the same time reiterating the bank's inflation-fighting mandate.
Strong performance in equity markets helped boost risk appetite, propping up the dollar to the detriment of the low-yielding yen and safe-haven Swissie.
The dollar gained 0.5 percent to 0.9932 Swiss francs, hovering just below parity through which it slipped for the first time two weeks ago <CHF=> and also rose to 99.43 yen <JPY=>.
The U.S. currency's recent sharp falls have made it vulnerable to abrupt swings higher in bouts of profit-taking, resulting in jittery, volatile markets.
However, analysts reckon that in the short-term at least, the broad trend will remain for more dollar weakness.
The U.S. Federal Reserve has slashed the benchmark fed funds rate to 2.25 percent from 5.25 percent just over six months ago, while the ECB has kept rates steady at 4 percent.
U.S. short-term interest rate futures now indicate investors see a nearly 50 percent chance of the Fed cutting interest rates by 50 basis points in April. A 25-basis-point rate cut is fully priced in. FEDWATCH
The final reading of U.S. fourth quarter growth is due at 1230 GMT, along with the weekly jobless data.
"Weak result of jobless claims and/or dovish Fed commentary should heighten the speculation on a 50 bps cut, resulting in further USD decline," JP Morgan said in a research note.
Analysts said tight credit conditions would also continue to keep investors wary of the dollar, due to worry about further fallout from the ongoing global credit crunch.
The ECB promised publicly to add additional liquidity if needed as the quarter comes to an end and the Bank of England and Swiss National Bank operated in the markets to try to get interbank lending rates down. (Reporting by Veronica Brown; Editing by Stephen Nisbet)