The dollar hit a two-week high against the euro on Tuesday as traders bet the United States will keep raising interest rates steadily to fight inflation despite signs of slower US economic growth. Analysts reckon the US Federal Reserve will raise rates on Tuesday for an eighth consecutive time by 25 basis points to 3 percent, and the market focus will be on the accompanying statement for clues on the future path of interest rates. Weak US economic data, starting with slower-than-expected first-quarter gross domestic product growth last week, had raised some concerns the US central bank may slow down the pace of rate rises.

The dollar hit its highest level against the euro since April 15 at $1.2831, but eased to $1.2853 by 1140 GMT, steady from the US close. The dollar also hit a two-week high against the Swiss franc of 1.2016.The greenback was steady against the yen at 105.19 yen but still near a six-week low around 104.60 yen set last week.

The euro traded little changed against the yen at 135.24 yen, not far off a three-month low below 135 yen set last week.Japan is on holiday from Tuesday to Thursday for Golden Week.

The Australian dollar fell three quarters of a percent to a two-week low against the dollar ahead of an interest rate decision at 2330 GMT. The Reserve Bank of Australia is expected to keep rates unchanged at 5.25 percent, although economists polled by Reuters gave a 20 percent chance of a rate hike.The Fed has raised rates in quarter-point increments at each of its seven meetings since last June, and some analysts expect it to continue raising the rate to 4 percent before pausing.That contrasts with interest rates of 2.0 percent in the euro zone and virtually zero in Japan.

<B> Euro zone warning</B>

Executives in the 12-nation euro zone, meanwhile, raised a recession warning on Monday by flagging the first contraction in manufacturing there in 20 months.Further data yesterday showed euro zone unemployment rising in March to 8.9 percent.

The UK economy also showed weakness, with UK manufacturing unexpectedly shrinking for the first time in two years, according to purchasing managers? data for April. Sterling weakened to one-week lows against the euro, compared with eight-month highs set in the previous day?s holiday-hit session, and hit two-week lows against the dollar.The International Monetary Fund?s managing director Rodrigo Rato added his voice on Tuesday to a chorus of international policymakers who have recently called for a more flexible exchange rate in China.

US Treasury Secretary John Snow repeated late on Monday that China should move to a flexible currency.But Chinese Trade Minister Bo Xilai said in Paris on Tuesday that Beijing wanted to be very careful about adjusting the value of the yuan in the face of international pressure to revalue.

<B> Carolyn COHN</B>