4 Min Read
* Euro recovers after dip on comments from ECB's Draghi
* Flash inflation nears 2 percent
* Euro still held back by risks from French elections
* Swedish crown hit by weak retail sales after Riksbank blow
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Patrick Graham
LONDON, April 28 (Reuters) - Strong inflation numbers drove the euro close to 5-1/2 month highs on Friday, turning markets back towards the prospect of a tightening of European Central Bank policy a day after it warned of substantial barriers to sustained higher price growth.
Official flash estimates put euro zone inflation at 1.9 percent in the first quarter, on the verge of crossing over the bank's target of below but close to 2 percent, and above estimates for a rise of 1.8 percent. According to standard EU measures, in Italy it was 2 percent.
That, allied with another batch of solid growth numbers from Spain, helped drive the euro as high as $1.0947 in morning trade in Europe, within inches of highs of $1.09515 hit this week after the first round of France's presidential election.
That followed a dip for the single currency on Thursday after ECB chief Mario Draghi took a cautious line and encouraged talk that the bank will seek to cap any gains for the currency for fear of undermining hard-won rises in prices.
Oanda strategist Craig Erlam was among those arguing that the bank will be able to do more in June to point to a reining-in of its ultra-loose policy later in the year, pushing up the market interest rates that investors get for holding euros.
"With Draghi acknowledging this (inflation) spike in yesterday’s press conference, it’s unlikely that it’s going to change the outlook as far as the ECB is concerned," Erlam said.
"But it will likely feed into the discussion come June, when many think the central bank will start planning for future tapering of its asset purchases."
By 1116 GMT, the euro had gained 0.6 percent to $1.0932, pushing the euro-dominated dollar index down a quarter of a percent to 98.821.
The end of last year was dominated by expectations of a Donald Trump-driven surge in growth, inflation and interest rates in the United States but that faith - and the dollar gains it inspired - have waned this year.
Instead, the dollar index has fallen in three of the past four months as signs grow that European banks, companies and consumers are finally getting back on their feet, encouraging expectations of higher euro zone rates.
CIBC strategist Jeremy Stretch said next weekend's second round of presidential elections in France was likely to weigh on the euro but could also be the trigger for a bigger push higher if centrist Emmanuel Macron makes good on poll predictions of a clear victory.
"We are in a holding pattern, waiting for the monetary tightening we have been talking about to come back fully onto the agenda," Stretch said.
"Draghi was clearly reluctant to sanction a changing of guidance with the risk of pushing the euro higher (but) once we get beyond next weekend it may be the time for the euro to have a little bit more of an upswing."
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Additional reporting by Tokyo markets team; Editing by Mark Heinrich)