Revised ECB expectations, oil lift euro; dlr eases

[NesmithDJ]

* Euro up 0.3 pct at $1.4770 as ECB rhetoric impact lingers

* Dollar rally over past month fizzling out

* Trade-weighted sterling at 12-year low; UK data deteriorates

By Jamie McGeever

LONDON, Aug 28 (Reuters) - The euro strengthened broadly on Thursday, extending its rebound from six-month lows against the dollar a day after comments from European Central Bank policymakers dimmed speculation the bank will cut interest rates.

ECB Board member Axel Weber was among those who said on Wednesday that talk about lower rates was premature, prompting traders to rethink their bets on euro zone rates.

The reverberations of these remarks were still felt on Thursday.

The euro rose to near lifetime highs against sterling, while the dollar -- which was also under pressure from oil's rise toward $120 a barrrel CLc1 -- eased further from its 2008 highs against a basket of currencies struck earlier this week.

Sterling remained weak after a measure of British house prices showed the biggest annual price fall for 17 years and retail sales posted their steepest fall since records began a quarter of a century ago.

The Bank of England's trade-weighted sterling index fell to its lowest level since 1996.

"The scale of easing that's priced into the market with regards to the ECB will be retraced. We're now in a more balanced environment with regards to the euro and dollar," said Derek Halpenny, senior currency economist at BTM-UFJ.

"In the near term, some of this dollar move (in the last month) is going to be retraced. Maybe the degree of pessimism with regard to some of the other currencies is overdone." At 1100 GMT the euro <EUR=> was up 0.3 percent on the day at $1.4770, two cents up from Tuesday's six-month low of $1.4567.

The dollar index .DXY fell a third of a percent to 76.793, pulling further away from this year's high of 77.619 touched earlier in the week.

The dollar fell a third of a percent to 109.10 yen <JPY=>, while crude oil rose more than 1 percent to $119.50 a barrel CLc1.

ECB HOT AIR?

Market reaction to figures showing a bigger-than-expected fall in German unemployment in August [nBAE001357] was limited.

Many economists reckon the increasingly gloomy euro zone economic outlook and tightening credit conditions will soon lead to a deterioration in the German labour market.

But ECB policymakers like Weber and bank Vice-President Lucas Papademos say preventing a wage-price spiral in the euro zone and taming inflation expectations is paramount.

Traders now only expect 30 basis points of rate cuts by the end of June next year, with the actual move not coming for at least six months.

But not everyone is convinced.

"We believe that the ECB talks a tough story but does not really deliver," said Steve Barrow, currency strategist at Standard Bank, adding that the ECB's rate hike in July was little more than a "token" gesture.

"It seems to us that the currency market also sees the ECB as being full of hot air."

Sterling, meanwhile, fell to a 12-year low on a trade-weighted basis <=GBP> of 89.7, after the Nationwide housing data and Confederation of British Industry retail sales figures painted a picture of an increasingly fragile economy.

For more, see [ID:nLS439960] and [ID:nLS505459].

"The pound's in trouble," said Halpenny at BTM-UFJ.

"The big problem for the UK -- and the markets are aware of it -- is the inability of the authorities to do much about it," he said, referring to Britain's fiscal deficit.

Despite continuing evidence of U.S. economic weakness, the dollar has broadly benefitted since late July from growing signs that the economic malaise has spread beyond the United States.

Weekly U.S. jobless claims and revised second quarter U.S. growth figures will be released at 1230 GMT. See [ECON].

Still, doubts remain about the ability of mortgage giants Fannie Mae and Freddie Mac to raise enough capital to sustain themselves in a troubled U.S. housing market, which may weigh on the dollar down the road.

Traders barely reacted to a Japanese newspaper report on Thursday that said the United States, Europe and Japan had planned to intervene and rescue a weak dollar in March.