FOREX-Dollar gains vs euro as credit anxiety eases

* Dollar gains on euro as credit rating fears ease

* Sterling hits $1.60 for first time since November

* Five-year Treasury auction attracts strong demand

* Euro struggles after ECB official comment on rates (Recasts, adds details, comment, changes data)

By Steven C. Johnson

NEW YORK, May 27 (Reuters) - The dollar rose against the euro on Wednesday as fear of an imminent U.S. credit downgrade faded and a European Central Bank official said interest rates could fall further if economic conditions worsen.

Sterling, meanwhile, rose above $1.60 for the first time in nearly seven months, propelled by hopes of improvement in the UK economy and banking sector.

Fear that soaring U.S. deficits threatened the United States' AAA credit rating hurt the dollar last week and pushed the euro briefly above $1.40, its highest level since January.

But for the second straight day, investors turned out in large numbers to snap up new Treasury debt, easing fears that the deficit had soured foreigners on holding U.S. assets.[ID:nTAR000636]