Euro near five-month high vs dollar on rising rates

TOKYO, Nov 24 (Reuters) The euro rose against the dollar on Friday, creeping towards a 5-{ month high hit on an upbeat German business sentiment survey that strengthened expectations euro zone interest rates will keep rising into next year.

In trade thinned by holidays in the United States and Japan, the euro got a lift on Thursday after Germany's Ifo business climate index rose to 106.8 in November, beating expectations for a fall to 105.2 ''The euro is appreciating against the dollar due to the rate story,'' said Toru Umemoto, chief forex strategist at Barclays Capital in Tokyo. ''But the yen story is more complicated because of the carry trade and the slowdown of the economy.'' The dollar was in sight of a 2-1/2-month low struck against the yen in the previous session, with some participants saying the market may be losing its hunger for carry trades in the low-yielding Japanese currency.

Others said the fall in the dollar/yen was driven by dealers clearing long-dollar and short-yen positions due to the holidays.

''There has not been any new factor that would prompt structural clearing of yen carry trades. Basically it's nothing more than dealers adjusting positions,'' said Masafumi Yamamoto, currency strategist at Nikko Citigroup in Tokyo.

Carry trades, in which investors borrow yen to buy a higher yielding currency, have helped propel the yen to a succession of all-time lows against the euro this year.

By 0325 GMT, the dollar was little changed at 116.30 yen after falling to 116.03 yen on electronic trading platform EBS a day earlier, its lowest point since early September.

The euro inched up to $1.2960 from around $1.2945 in late U.S.

hours. It rose as far as $1.2976 on Thursday, the highest since the start of June and just off the year's peak of $1.2980.

The single European currency rose to 150.70 yen from around 150.55 yen, still off the record high of 151.68 yen marked at the start of the week.

The dollar bought 1.2230 Swiss francs after striking a three-month low of 1.2206 francs in the previous session.

RATES BOOST EURO The strong Ifo reading for Germany, as well as data showing the euro zone's biggest economy expanded for a seventh straight quarter in July-September, bolstered forecasts that the dollar's rate advantage over the euro will keep dwindling.

The European Central Bank is widely expected to bump up rates from 3.25 percent at next month's policy meeting, and many in the market forecast another boost early next year.

''The recent set of data suggests that the ECB will provide a hawkish report at its next meeting,'' BNP Paribas wrote in a note to clients. ''This background allows only very limited and corrective euro setbacks.'' The Federal Reserve, which has held rates at 5.25 percent since June, has indicated that inflation is still a risk and is leaning towards hiking again, although many investors believe the central bank's next move will be to cut rates in 2007.

REUTERS AB VV1021