FOREX-Euro hits 3-week high on ECB rate speculation

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By Naomi Tajitsu

LONDON, May 20 (Reuters) - The euro hit a three-week high against the dollar on Tuesday, boosted by comments from a German think-tank that euro zone interest rates would soon rise.

That helped drag the U.S. unit down to a one-month low against a basket of six major currencies.

Wolfgang Franz, the president of the ZEW economic research institute, said that he thought the European Central Bank will raise rates soon, even as a survey on investors' morale by the institution unexpectedly worsened for the second straight month.

The ZEW's gauge of expectations for Germany fell to -41.4 in May from -40.7 in April. Click on [ID:nBAE001218]. Despite his remarks about an ECB rate rise, Franz said that stellar German economic growth seen in the first quarter would not continue.

The euro was initially pressured by the weak ZEW reading, but then shot up on Franz's rate comment. Analysts said the move reflected market uncertainty about the ECB's rate outlook, given that the economy is slowing amid persisting inflation risks.

"Even though the number wasn't fantastic, the ZEW president is saying that the ECB is going to raise rates in the near future," said Paul Mackel, director of currency strategy at HSBC Markets.

"The fact that the euro has responded to contrasting signs highlights the current sentiment."