Sterling gains on rate outlook, yen slips

NEW YORK, June 20 (Reuters) - Sterling rose on Wednesday after Bank of England meeting minutes hinted at a rate hike as soon as July, while the euro and dollar gained for the fifth day in six against the low-yielding yen.

With no U.S. economic data to provide direction, traders focused on the differences in relative interest rates and traders favored currencies tied to higher or rising rates.

Sterling rose to $1.9941 , a two-week high, and hit a fresh 15-year peak against the yen after BoE minutes revealed that officials fell one vote shy of lifting interest rates at a meeting earlier this month, with central bank governor Mervyn King among the outvoted who favored a hike.

In Sweden, the Riksbank lifted rates to 3.5 percent and unexpectedly raised its year-end rate forecast to 4 percent, pushing the crown up 1.5 percent against the dollar and putting it on track for its biggest daily gain against the euro in more than five years .

Earlier this week, the euro hit its best level against the Swedish currency in more than a year.

"It seems clear to me that central banks globally are a little more comfortable with the risk outlook and are taking a bit more liquidity out of the markets," said Firas Askari, head of currency trading at BMO Capital Markets in Toronto.

The BoE minutes "really caught people off guard," Askari said, and 44 of 64 economists polled by Reuters now expect rates to go to 5.75 percent in July rather than August.

The poll also found economists expect rates to hit 6 percent by year end. For more, see [ID:nL20587237]. The BoE's King and UK finance minister Gordon Brown will both speak around 4 p.m. EDT (2000 GMT).

The yen, tethered to Japanese interest rates at just 0.5 percent, continued to suffer as investors borrow it cheaply to finance purchases of higher-yielding currencies and assets.

Late morning, the euro was up 0.2 percent at 165.90 yen , near a record high above 166 yen.

The dollar hovered near a 4-1/2-year peak at 123.65 yen , up 0.25 percent from late Tuesday. The Japanese currency also plumbed multiyear lows against the Australian and New Zealand dollars.

Bank of Japan Governor Toshihiko Fukui said last week officials wanted to be sure capital and consumer spending remained firm before pushing interest rates higher.

"Japan's central bank has shown it's in no hurry to raise rates, and with U.S. equities stable, risk appetite remains pretty good," said Michael Malpede, senior currency strategist at Man Global Research in Chicago.

The euro was little changed at $1.3422 as a backup in U.S. bond yields failed to nudge the greenback higher.

The Fed is seen keeping interest rates on hold at 5.25 percent this year, while markets are bracing for at least two more hikes in euro-zone rates, which now stand at 4 percent.

The kiwi dollar also pushed to US$0.7629 against the greenback as interest rates of 8 percent continued to lure investors who shrugged off intervention by New Zealand's central bank earlier in the month to weaken the currency.

The Swiss franc, which has the second-lowest interest rate in the developed world after the yen, rose against the euro and dollar after producer and import price inflation in May came in much higher than expected.

By Steven C. Johnson © Reuters 2007