LONDON, June 7 (Reuters) The dollar hovered near the previous day's one-month high against the yen and hit 6-day highs against the euro on Wednesday, on growing expectations the Federal Reserve will raise interest rates later this month.
The U.S. currency rose on Tuesday after St. Louis Fed President William Poole was quoted by the Wall Street Journal as saying that a slowing economy on its own may not reduce inflationary pressures.
That echoed remarks by Fed Chairman Ben Bernanke, who sparked a rebound in the dollar on Monday after he said the Fed needed to be vigilant to make sure inflation stays under control.
The comments convinced more investors that the central bank will extend its two-year credit tightening campaign by lifting overnight rates a quarter point to 5.25 percent at its next meeting on June 28-29.
''The dollar is building up on comments like those from Poole ...
confirming what Bernanke said a day earlier,'' said Peter Fontaine, FX strategist at KBC Brussels.
''There are a lot of dollar oversold conditions, so it's technically-driven as well.'' The euro was also under pressure against the dollar after euro zone finance ministers made it clear on Tuesday that they didn't want the single currency to extend its export-denting rally much beyond current levels around $1.30.
Austria's Finance Minister and current EU President Karl-Heinz Grasser said on Wednesday that as long as the euro stayed in a $1.20 to $1.30 band, it was okay.
''There's definitely concern that a break above $1.30 would not be good for euro zone growth, which is export-led,'' said Kamal Sharma, currency strategist at Bank of America.
By 0735 GMT, the dollar was trading at 113.45 yen, up slightly on the day and only a few ticks below one-month highs set in the previous session.
The euro was down a quarter percent at $1.2789. The single currency dipped to 145.08 yen, after hitting seven-week highs of 145.48 on Tuesday, just shy of a record high.
EURO/DOLLAR $1.30? French Finance Minister Thierry Breton, Luxembourg's Jean-Claude Juncker and Spanish Economy Minister Pedro Solbes all indicated the euro was reaching the end of its tolerance level, after it hit 1-year highs near $1.30 on Monday.
But the euro was showing strength against other currencies besides the dollar as most analysts expect the European Central Bank to lift rates by 25 basis points to 2.75 percent on Thursday.
''The market has discounted a 25 basis point rate hike by the ECB and expects hawkish comments from (ECB President Jean-Claude) Trichet, which could maintain the additional rate hike expectations,'' said Toru Umemoto, chief forex strategist at Barclays Capital in Tokyo.
Some traders said that with speculation simmering in the market for a potential half-percentage point increase, the dollar could benefit from disappointment if the increase is less.
The Australian dollar hit seven-week lows below US$0.74 after the Reserve Bank of Australia left interest rates unchanged at 5.75 percent, as expected.
The Reserve Bank of New Zealand is expected to leave rates unchanged at 7.25 percent when it makes its policy decision at 2100 GMT.
MORE RATE CLUES AHEAD In separate remarks on Tuesday, Fed Governor Susan Schmidt Bies said the central bank was trying to walk a tightrope between high inflation expectations and a slower growth outlook.
Fed funds futures indicate an 80 percent chance of a rate hike this month, up from less than 50 percent at the end of last week.
For further clues about the Fed's thinking on rates, the market was waiting to hear speeches later in the day from Fed Governor Mark Olson and especially Atlanta Fed President Jack Guynn, who will speak on the economic outlook and housing market.
REUTERS CS PM1353