FOREX-Dollar gains, cheered by home sales, ECB rate view

* Dollar boosted by rise in pending home sales

* Euro falls as ECB's Trichet highlights risk to growth

* Dollar index hits highest level in 5-1/2 months (Recasts, updates prices, adds comment)

By Gertrude Chavez-Dreyfuss

NEW YORK, Aug 7 (Reuters) - The U.S. dollar rose to a 5-1/2-month high against a basket of currencies and a seven-week peak versus the euro on Thursday, bolstered by a surprise rise in June home sales and diminished expectations for euro-zone interest rate increases.

The gain in pending home sales offset a bleak U.S. jobless claims report, supporting a growing view that the current housing slowdown may be nearing a bottom. The data backed expectations of U.S. rate hikes this year, which has fueled a rebound in the dollar over the last two weeks.

By contrast, European Central Bank President Jean-Claude Trichet, in remarks after the bank held rates at 4.25 percent, said he expects economic growth in the euro zone to weaken substantially this year, even as he sees inflation remaining above the ECB's target. For more details, see [ID:nL7650401].

Following his comments, investors unwound bets for ECB interest rate increases this year, limiting the euro's appeal to global investors.

Nick Bennenbroek, head of foreign exchange strategy, at Wells Fargo in New York, said the knee-jerk reaction to Trichet's comments was to buy the dollar and sell the euro, although he believed the ECB chief's statements were balanced.

"Overall, today's price action reflects the market's bias towards buying the dollar. There is a general perception that weakness across other international economies are more pronounced than it was earlier this year, prompting investors to sell foreign currencies and buy the dollar."

In midday trading, the dollar index on the ICE futures exchange rose to 74.518 .DXY, the highest since late February.

The euro <EUR=> fell to a seven-week low at $1.5335, down half a percent from late on Wednesday.

The dollar rose 0.2 percent against the Swiss franc to 1.0621 francs <CHF=>.

HOME SALES RISE

Data showed on Thursday that U.S. home sales contracts signed in June rose to their highest level since October. See [ID:nN07290813].

"This is the second upside surprise in three months, so it is hard to ignore. Anything which reduces inventory, whether of foreclosed homes or not, is a very welcome development," said Ian Shepherdson, chief U.S. economist at High Frequency Economics, at Valhalla, New York.  Continued...