Euro lifted by Trichet's Portugal comments

(Reuters) - The euro gained against the dollar for the first time in three sessions on Thursday after ECB President Jean-Claude Trichet said the central bank would relax rules and keep providing liquidity to struggling Portugal, helping allay worries about Europe's debt crisis.

At a news conference after the central bank raised its benchmark interest rate by 25 basis points to 1.50 percent, the European Central Bank's chief said the ECB had decided to suspend the application of the minimum credit rating threshold in Portuguese collateral.

"While to some extent this is a reaction to the recent downgrade of Portuguese debt, it also does show that the ECB position remains flexible, which could be important for ongoing discussions on a Greek debt rollover," said Vassili Serebriakov, currency strategist at Wells Fargo in New York.

While Trichet did not use the term "strong vigilance" when speaking about monetary policy, a wording historically used by the central bank to communicate another rate hike is near, he did use the phrase "monitor very closely," which indicates further tightening could emerge in months ahead.

In late morning New York trade, the euro was at $1.4342, up 0.2 percent on the day and far above the session low of $1.4219 hit immediately after Trichet started his news conference.

"The ECB chief is clearly trying to walk the tightrope as the central bank attempts to normalize monetary policy for the core euro zone where real rates remain negative while at the same time providing liquidity for the troubled periphery economies," said Boris Schlossberg, director of currency research at GFT Forex in New York.

Analysts said that while the decision on Portugal is not entirely surprising, it indicates some degree of flexibility on the part of the ECB as euro zone policymakers struggle to reach agreement on solving the region's spreading debt crisis.

Portugal's debt has come under scrutiny after Moody's this week downgraded the country's credit rating to junk.

Meanwhile, U.S. private employers stepped up hiring in June and the number of Americans filing for jobless benefits fell last week, strengthening views the economy is positioned for a pick-up in the second half.

"What is good news for risk and the U.S. economy is bad news for the yen, as this currency pair (dollar versus yen) is largely driven by interest rate differentials," said Andrew Cox, G10 strategist at CitiFX, a division of Citigroup in New York.

"The data certainly backs the risk-on trade and revisions higher in Friday's payrolls report can be expected."

The dollar was up 0.4 percent at 81.28 yen. Against a basket of currencies .DXY the dollar was down 0.2 percent at 74.974.

Prior to the ADP employment report on private sector payrolls, the U.S. government had been expected to report on Friday that non-farm payrolls increased 90,000 last month, according to a Reuters survey, after rising only 54,000 in May. However, the ADP report had some economists bumping up their forecasts.

The euro rose 0.8 percent to 1.2116 francs, holding above a record low of 1.1800 francs on June 24. The dollar last traded up 0.6 percent to 0.8442 francs.

The safe-haven Swiss franc had benefited smartly from the flare-up in sovereign debt concerns but tends to fall as investors embrace risk.

(Additional reporting by Wanfeng Zhou and Steven C. Johnson in New York and Nia Williams in London; Editing by Kenneth Barry)

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