FOREX-Euro hits 4-month high on ECB rate outlook

* Euro at 4-month high above $1.4 on rate hike expectations

* Middle East buying helps euro erase earlier losses

* Moody's cuts Greece rating, long EUR positions stretched

* Dollar index hits 4-month low

By Jessica Mortimer

LONDON, March 7 (Reuters) - The euro rose to a four-month high on Monday, pushing above the key $1.40 level on reported buying by Middle East accounts and expectations of higher interest rates as the market shrugged off a ratings cut on Greece.

The euro has been underpinned since European Central Bank president Jean-Claude Trichet surprised investors on Thursday by saying that euro zone interest rates may rise next month, and analysts said this was likely to keep providing support.

The dollar fell to a four-month low against a basket of currencies on expectations that U.S. monetary policy, by contrast, will stay loose.

With long euro positions looking stretched, analysts said the euro could be vulnerable to profit-taking, especially above $1.40.

The single currency rose 0.2 percent to a four-month high of $1.4020, according to Reuters data, extending gains after breaking above reported stop loss orders at $1.4005.

Traders said buying by Middle East accounts helped lift the currency, which had earlier fallen after Moody's slashed Greece's debt rating by three notches and kept it on review for a further possible downgrade. [ID:nLDE7260D6]

"There's a bit of bad news with the Greece downgrade and Ireland wanting to renegotiate (its) bailout and there's some focus on this, but it's too early for concerns about sovereign debt to really come back and hurt the euro," said Niels Christensen, currency strategist at Nordea in Copenhagen.

Adding to the negative tone, Fitch downgraded Spain's ratings on Friday. [ID:nLDE7230QU]

The single currency broke above Friday's four-month high of $1.4009 hit on the EBS trading platform. Traders cited options barriers at $1.4050.

With the euro having breached resistance at its early February peak of $1.3862 during last week's rally, one possible upside target is now $1.4283, a peak on charts hit on EBS in early November.

Latest positioning data from the U.S. Commodity Futures Trading Commission pointed to the potential for profit-taking, however, showing speculators increasing bets in favour of the euro to the highest level since January 2008. [IMM/FX]

The dollar index <.DXY> hit a four-month low of 76.221.

RATE DIFFERENTIALS

The dollar gained support after Friday's above-forecast U.S. jobs data, which analysts said helped prevent the euro leaping well above $1.40, though gains were limited as expectations that U.S. policy will stay loose remained intact. [ID:nOAT004757]

Strong job growth is seen necessary for the Federal Reserve to hold off from conducting further rounds of quantitative easing. The Fed's second round of QE, consisting of $600 billion in bond purchases, is due to be completed in June.

"Despite signs of a recovery in the U.S., the Fed will continue to fight growth risks while the ECB will fight inflation risks," BNP Paribas analysts wrote in a report.

"With the ECB signalling a rate hike in April to alleviate inflationary pressures, EUR/USD should remain well supported as interest rate differentials work in favour of EUR."

The euro was steady against the yen at 115.11 , having retreated from Friday's peak of 116.00 yen, the euro's highest against the yen since May 2010.

A trader for a major Japanese bank in Tokyo said Japanese exporters sold the euro on Friday as it rallied, and added they might still try to sell the euro above 115 yen.

The dollar eased 0.2 percent to 82.12 yen , pulling back from Friday's intraday peak of 83.09 yen, with support seen around 81.60, a level that held after several tests in late February and early March.

(Additional reporting by Ian Chua in Sydney; Editing by John Stonestreet)