Array

TOKYO, May 15 (Reuters) The dollar sank to its lowest level in a year against the euro on Monday, pushed lower on growing market expectations that the end to a two-year strech of rising U.S.

interest rates is near.

Dollar sentiment continued to sour despite an unexpected narrowing of the U.S. trade deficit on Friday as a growing number of traders expect the Federal Reserve to pause tightening policy next month after lifting rates to 5 percent last week.

''If talk of an end to U.S. rate rises continues, the market is going to become more comfortable about taking the dollar lower,'' said Shigeru Komatsu, forex manager at Sumitomo Trust and Banking.

''It's going to be difficult for the dollar to rebound to 110 yen,'' he said, adding that a drop into the 107-108 yen region this week was not out of the question.

Speculation that the Fed may stop tightening policy comes after the central bank boosted rates at all 16 of its policy meetings since June 2004, driving the dollar up 15 percent against the euro and the yen last year.

A Reuters poll showed that 14 out of 20 Wall Street economists expect the Fed to keep rates unchanged at its June meeting.

Meanwhile, the European Central Bank is seen lifting rates to 2.75 percent next month, while many in the market anticipate a rise in Japanese rates during the July-September quarter.

The euro was at $1.2950 after earlier rising to around $1.2970, its highest level since May 2005.

The U.S. currency also struck a one-year low against the Swiss franc around 1.1920 francs and was near a one-year trough versus sterling.

The dollar slipped to 109.65 yen, closing in on the 8-month low of 109.31 yen touched on Friday.

Dollar weakness continued despite data on Friday showing that record high exports pushed the U.S. trade deficit down to $62 billion in March, its lowest level since August and the second straight month of narrowing.

Still, the reading in the University of Michigan's consumer sentiment survey was the lowest since the aftermath of Hurricane Katrina, falling to 79.0 in May from 87.4 in April, increasing concerns that spending could slip in the near future.

With the market fixated on global rates, traders will look to comments from Bank of Japan Governor Toshihiko Fukui, who is slated to deliver two speeches on Monday, for clues into when the BOJ will raise rates, which have been hovering near zero for around five years.

REUTERS PG PM0531