FOREX-Dollar prevails as euro, sterling hit rocky road

* Euro slides below $ 1.07, sterling flirts with $ 1.47

* Dollar index back near 99.000, at three-week highs

* Aussie outperforms on the week, China data up next

By Ian Chua

SYDNEY, April 10 (Reuters) – The dollar hovered at three week highs against a basket of major currencies early on Friday as the hapless euro extended its decline and disappointing trade data knocked sterling lower.

The euro fell as far as $ 1.0637, reaching a low last seen on March 19. It last stood at $ 1.0665, down more than 3 percent from Monday’s peak of $ 1.1036.

“It’s hard to avoid the conclusion that carry trades are playing a part. Note that German bond yields out to 8 years are now in negative territory, the euro is very much a funding currency,” said David de Garis, senior economist at NAB.

Sterling wallowed just above a three-week trough of $ 1.4684 , having slid more than 1 percent after data showed Britain’s trade deficit widened more than expected.

The figures suggested the strong pace of economic recovery could cool slightly, weighing on a market already fretting about the outcome of a May 7 national election.

Against the yen, the dollar climbed to a three-week high of 120.74, completely recovering from last Friday’s post-payrolls selloff that saw it fall to 118.71.

As a result, the dollar index is back around 99.000 and eyeing a 12-year peak of 100.390 set last month. The index is up 2.5 percent so far this week.

The other standout currency is the Australian dollar, which is on track to end the week firmer against the greenback and sharply higher on the lower-yielding euro.

This is partly due to the Reserve Bank of Australia’s decision on Tuesday not to cut interest rates, an outcome that prompted a squeeze in short Aussie positions.

The Aussie last traded at $ 0.7700, up 0.9 percent on the week. However, several attempts to break above $ 0.7740 ended in failure overnight, suggesting the market is wary of getting too carried away.

Indeed, debt markets imply a near three-in-four chance that the RBA will cut interest rates next month and analysts appear to be getting more dovish by the week.

RBC now expects interest rates will be lowered by a total of 75 basis points in the months ahead.

“We continue to expect a 25bp cut in May and are now adding two more cuts to our RBA profile taking cash to a new low of 1.5 percent by end 2016,” said Su-Lin Ong, head of Australian and New Zealand FIC Strategy.

“Our rationale is threefold: further weakness in key commodity prices/terms of trade, a weaker capex outlook coupled with faltering business confidence, and a sticky currency.”

The key focus for Asia on Friday is Chinese inflation data, although this report had less of a market impact recently. A soft reading should give Beijing more room to inject fresh stimulus if needed.

(Editing by Eric Meijer)