FOREX-Euro hits the skids as sterling flies

Reuters

* Euro under broad pressure, hits two-year lows vs sterling

* Dollar index rises to one-month highs

* Aussie bounces off two-week trough, kiwi still struggling

By Ian Chua

SYDNEY, July 17 (Reuters) - The euro wallowed at five-month lows against the yen on Thursday and held near a two-year trough on sterling, having weakened broadly overnight in a move that should provide some comfort to the European Central Bank.

Traders said recent upbeat UK data had prompted investors to switch into sterling from the euro. That in turn weighed broadly on the common currency, which extended its losses for a second session on Wednesday.

The euro bought 137.50 yen, having hit a five-month low at 137.45. Against sterling, it fell as far as 78.88 pence, reaching a level not seen since September 2012. The common currency plumbed a one-month low on the dollar at $1.3520.

Investors warmed to the pound this week after a surge in UK inflation bolstered expectations for an interest rate hike later this year. But data on Wednesday showing no signs of wage pressure slightly tempered those views.

Still, the monetary policy landscape in the UK stands in stark contrast with the euro zone, where the risk is for the European Central Bank (ECB) to ease further.

"We believe circumstances are fast increasing the risks that the ECB will be forced to launch further unconventional measures," analysts at Barclays wrote in a note to clients.

"What, when and how are less certain, but there are strong hints that a weaker euro may be the only channel to reflate the economy."

Weakness in the euro helped lift the dollar index to a one-month high of 80.577. The greenback was flat against the yen at 101.65, having come under a bit of pressure at 101.80.

The dollar slightly underperformed its Canadian peer after the Bank of Canada was neutral on the next move for interest rates. Some in the market had wagered the central bank would go all the way and adopt an easing bias.

The dollar eased to C$1.0744, from a three-week high of C$1.0795.

Also showing a bit of resilience, the Australian dollar bounced back to $0.9365 from a two-week trough of $0.9329 thanks to buoyant risk appetite in Europe and the United States.

Its New Zealand counterpart, however, saw no such relief after tame local inflation data on Wednesday raised questions about whether the Reserve Bank of New Zealand will continue to tighten much more this year.

The kiwi last traded at $0.8715, holding not far from a three-week low at $0.8690.

Traders said a dearth of any meaningful data out of Asia on Thursday will probably see the major currencies consolidate at current levels.

(Editing by Richard Pullin)

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