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Monday June 16, 2008 - 21:23:37 GMT
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FOREX NEWS-Dollar falls on NY factory survey, euro zone inflation

Mon Jun 16, 2008 4:42pm EDT

(Recasts; updates prices, changes byline)

* Dollar falls as euro zone inflation scales record peak

* ECB July rate hike seen almost certain

* New York manufacturing gauge tumbles in May

By Vivianne Rodrigues

NEW YORK, June 16 (Reuters) - The dollar fell against the euro on Monday, halting a three-session winning streak, as record euro-zone inflation supported expectations of a European Central Bank interest rate hike next month.

A $2.8 billion quarterly loss from investment bank Lehman Brothers Inc (LEH.N: Quote, Profile, Research, Stock Buzz), an unexpectedly steep contraction in New York state manufacturing and another dose of inflation-busting talk from an ECB official also weighed on the U.S. currency.

Lehman's quarterly loss, while in line with market expectations, served as a reminder to investors that the credit crisis was still far from over.

The dollar rallied last week as traders bet the Federal Reserve could start raising interest rates as early as August to curb rising price pressures and inflation expectations.

"The U.S. dollar had a very good week last week. People have been prompted to take profits on last week's gains," said Vassily Serebriakov, a currency strategist at Wells Fargo in New York. "News of losses at Lehman Brothers as well as a spike in oil prices have contributed to dollar weakness."

The euro earlier raced to a session high of $1.5517 <EUR=>, pushing further away from Friday's one-month low around $1.5300, according to Reuters data. In late afternoon trading in New York, the euro zone currency last traded at $1.5478, up 0.6 percent on the day.

In the United States, economic data showed the New York Fed's "Empire State" general business conditions index fell to minus 8.68 from minus 3.23 in May, worse than market expectations for a reading of minus 2.00.

ECB RATE HIKE SEEN

Euro zone inflation rose to a record high of 3.7 percent year-on-year in May, prompting hawkish comments from ECB Governing Council member Nout Wellink, who on Monday said stabilizing inflation in the medium term was a priority.

Analysts said the surge in May's annual euro-zone inflation rate together with Wellink's comments suggested that a July ECB rate hike was almost certain.

An ECB interest rate increase would further enhance the appeal of the euro at the expense of the dollar.

"It pretty much puts a lock on it, unless we hear something different from (ECB President Jean-Claude) Trichet," said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey. "It's a done deal at this point."

Trichet earlier this month had laid the groundwork for a July rate hike, saying it was possible, though not a certainty.

The rate hike expectations gave the euro an edge against both the dollar and the Japanese yen.

The euro earlier climbed to a session high of 167.68 yen, its highest level since October <EURJPY=>, according to Reuters data. It was last trading at 167.28 yen, up 0.5 percent.

While an ECB interest rate increase appears certain, analysts doubt the Fed will follow Chairman Ben Bernanke's tough inflation talk with action because U.S. economic growth remains sluggish.

A column in The Washington Post, citing unnamed sources, on Monday reported that Bernanke does not intend to raise U.S. interest rates because he is more worried that soaring oil prices will slow global growth rather than stoke inflation.

Later in the session, a top economic adviser for Republican presidential candidate John McCain said that McCain would pursue a strong dollar policy if elected president and would not rule out intervention to support the unit if circumstances demanded. For details, see [ID:nN16273753]

U.S. interest rate futures continued to lean toward a Fed rate hike as early as August. (Additional reporting by Lucia Mutikani; editing by Gary Crosse)

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