Euro heads for second straight monthly gain versus dollar

An employee counts U.S. dollar notes at a money changer in Jakarta January 27, 2010.

NEW YORK (Reuters) - The euro headed for its second consecutive monthly advance against the dollar on Monday and more gains could be in store after a jump in euro zone inflation bolstered the view interest rates in the region could rise more quickly than in the United States.

That helped the euro reverse losses suffered on Friday as unrest in Egypt drove up oil prices and sparked a safe-haven bid for dollars and Swiss francs.

Asian central banks and some Middle East accounts were among the most active euro buyers, traders said. Some said the euro could renew a march toward $1.40 in the weeks ahead, provided trouble in Egypt does not spread to other countries.

Brad Bechtel, managing director at FX execution firm Faros Trading in Stamford, Connecticut, said inflation expectations and month-end buying could drive the euro to $1.3750. He added that "$1.40 is still on the cards" if Egypt tensions die down.

While protesters filled the streets of Cairo for a seventh straight day, investors seemed to take heart that violence and disorder had at least not worsened.

"The Egypt crisis is looking increasingly like a tempest in a teacup from a global investor perspective, with developments over the weekend insufficient to maintain the safe-haven bid seen late last week," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.

The euro rose as high as $1.3740 on trading platform EBS and was last up 0.6 percent at $1.3692. Support is seen at $1.3570, the 50 percent retracement of its November-to-January decline. It was on pace to post a gain of 2.3 percent in January, which follows a gain of 3.1 percent in December.

Sterling jumped 1 percent to $1.6012, boosted by euro gains in a reverse of Friday's losses.

The euro also rose against the Swiss franc and yen. The dollar was down 0.1 percent at 82.05 yen.

Reports over the weekend that the European Union was working on a solution to reduce Greece's debt burden also helped boost the euro, traders said.

INFLATION, SOVEREIGN STRESS

Consumer prices in the 17 countries using the euro rose 2.4 percent year-on-year, holding above the ECB's target of just below 2 percent for the second month. European Central Bank President Jean-Claude Trichet has already warned about price pressures and is to speak Thursday after the ECB's monthly meeting.

Easing worries about the euro zone sovereign debt crisis and growing expectations that the ECB could hike rates sooner than the Federal Reserve have supported the euro in recent weeks.

The three-month Euribor rate, a mix of interest rate expectations and banks' lending appetite, rose to 1.074 percent, the highest since July 2009.

Citing a high U.S. jobless rate, the Fed has made it clear it is not close to raising interest rates from near zero, even as U.S. economic data has shown signs of improvement.

Despite the euro's recent recovery, Aroop Chatterjee, currency strategist at Barclays Capital in New York, cautioned that a lot of good news has already been priced in.

"We see disappointment on the euro sovereign debt issue as significant differences remain between the euro area policymakers," he said. "We see conditions likely pushing those countries to either getting a bailout from the EU/IMF as in the case of Portugal, or the potential for a credit line being extended by the IMF as in the case of Spain."

Chatterjee forecasts the euro will decline to about $1.30 by March and trade around $1.34 in three months, before rebounding to $1.42 over a year as the U.S. dollar is pressured by worries about U.S. fiscal challenges.