LONDON, June 5: The euro turned sharply higher against the dollar on Thursday after the European Central Bank warned that interest rates could be hiked as early as next month to cope with rising inflation.

Dealers said the markets had been expecting the ECB to sound a hard line on inflation but were surprised when president Jean-Claude Trichet warned that rates could be raised.

His remarks gave the euro an immediate boost against the dollar, which earlier in the week itself had found support when US Federal Reserve chairman Ben Bernanke signalled that US rates might not be cut again in the near term.

Dealers said Bernanke’s and Trichet’s comments together suggested that both central banks were finding common ground that inflation now represented the greater risk, rather than slowing growth.

The Fed has slashed interest rates sharply since late last year in an effort to keep the US economy on track, sparking criticism of the ECB, which held rates unchanged, that it was focused on inflation and ignoring economic weakness.

Both the ECB and the Bank of England kept their interest rates on hold at 4.0 and 5.0 per cent, respectively on Thursday, in line with market expectations.

In late European trade, the euro was at 1.5555 dollars, up sharply from 1.5427 dollars earlier in the day and 1.5440 dollars in New York late on Wednesday.

Against the Japanese currency, the dollar rose to 106.05 yen from 105.14.

Analysts said Trichet’s remarks supported the euro and made a eurozone rate hike in July a near certainty.

“To avoid damage to its reputation, the ECB can refrain from raising rates only if economic indicators do not only fall gradually -- as in the past -- but decline sharply,” said Commerzbank chief economist Joerg Kraemer.

The Fed next meets on June 24-25 when it is expected to keep rates on hold, having already slashed borrowing costs to 2.00 percent from 5.25 per cent.

Dealers were keenly awaiting Friday’s key monthly US payroll report for their next lead on the outlook for the US economy.

In London on Thursday, the euro changed hands at 1.5555 dollars against 1.5440 late on Wednesday, at 164.96 yen (162.38), 0.7955 pounds (0.7896) and 1.6183 Swiss francs (1.6083).

The dollar stood at 106.05 yen (105.14) and 1.0403 Swiss francs (1.0414).

The pound was at 1.9557 dollars (1.9548).

On the London Bullion Market, the price of gold fell to 878.75 dollars per ounce from 883.50 dollars late on Wednesday.—AFP