LONDON (Reuters) - The euro hit a six-week high against a broadly weaker dollar on Thursday with doubts creeping in as to whether pent-up demand for the U.S. currency over the year-end will be as strong as previously thought.
Implied interest rate spreads also moved in the euro's favor after European Central Bank Executive Board member Juergen Stark said late on Wednesday the bank did not have a lot of room for maneuver on rates after its cut last week.
Having climbed on a wave of risk aversion in recent months in tandem with the low-yielding Japanese yen, some analysts said further dollar demand into the year-end from deleveraging flows might be showing some sign of cooling. A fall in volatility also indicated that extreme risk aversion may be easing.
"We're seeing some year-end position adjustment. With volatility coming down, it may prompt some investors to dabble in risk," said Geoffrey Yu, strategist at UBS in London.
By 1150 GMT (6:50 a.m. EST), the euro was up 1.1 percent on the day at $1.3171, having hit a six-week high of $1.3186 earlier in the session.
Implied volatility on one-month dollar/yen currency options fell below 20 percent on Thursday compared with that level seen at the start of the week.
The single currency spiked late on Wednesday after the Stark comments, while implied euro/U.S. rate spreads reflected a cooling in ECB rate cut expectations. By contrast, the U.S. Federal Reserve is expected to cut borrowing costs again next week.
"If the euro zone is being perceived to still have rates at substantially higher levels then obviously there's a positive rate spread, but I'm not convinced that its ultimately going to be positive as the dynamics of the euro zone economy are pretty weak," Rabobank markets strategist Jeremy Stretch said.
Against a basket of currencies, the dollar was down 1.0 percent at 84.604 .DXY, while it also dipped 0.4 percent versus the yen to 92.18 yen.
The Swiss National Bank became the latest leading central bank to cut interest rates, but its impact was limited as the 50 basis point move paled in comparison with more dramatic reductions from other central banks last week.
The dollar traded up at 1.1927 Swiss francs compared with 1.1905 francs just before the SNB rate decision, and the euro rose to 1.5713 francs from 1.5625 francs.
CRACKS IN GLOBAL PLAN?
There was little reaction in FX markets to the approval of a $14 billion auto industry bailout plan by the U.S. House of Representatives.
While the House stuck to its plan, uncertainty was seen in the Senate, where a razor-thin Democratic majority cannot ensure passage. A vote could come as early as Thursday, but some Republicans have vowed to slow or even block the legislation.
Elsewhere, cracks were appearing in the global effort to drag the world out of recession on Thursday with Germany attacking Britain ahead of an EU summit for rushing into debt to bail out industries and pump up growth.
In an interview with Newsweek magazine, Finance Minister Peer Steinbrueck urged governments to pause before pledging to spend billions of dollars to try to push their economies out of trouble.
