* Euro at 4-mth high above $1.4 on expectations of rate rise
* Middle East buying helps euro erase earlier losses
* Moody's cuts Greece rating, long EUR positions stretched
* Dollar index hits 4-month low; Trichet comments awaited
By Jessica Mortimer
LONDON, March 7 (Reuters) - The euro jumped to a four-month high against the dollar on Monday as expectations of a euro zone interest rate hike next month helped it vault back above $1.40 and investors shrugged off a ratings downgrade of Greece.
Traders said the single currency was lifted by reported buying by Middle East accounts, with gains accelerating as stop loss orders were triggered on the break of $1.4005 and $1.4025, though it stalled ahead of an options barrier at $1.4050.
However, with the latest data showing speculators' long euro positions at their highest level since January 2008, analysts said positioning looked stretched, which could leave the euro vulnerable to profit-taking.
The single currency has been strong since European Central Bank President Jean-Claude Trichet surprised investors on Thursday by saying that interest rates may rise next month, and analysts said this was likely to keep providing support.
"Sentiment is bullish at the moment and we could see a test of the 1.4080/00 area," said Richard Wiltshire, chief foreign exchange dealer at ETX Capital.
"The euro will stay bid on any dips ahead of April's rate announcement. I would assume they can't change their rhetoric, and we have seen a growing number of ECB officials talking about rate hikes sooner rather than later".
Market players were watching for comments from Trichet at a news conference, expected around midday, with traders saying further hawkish comments could see the euro consolidate its gains above the key $1.40 level.
The single currency rose 0.3 percent to a four-month high of $1.4031, according to Reuters data.
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.
The dollar also fell to a four-month low against a currency basket of 76.166.
RATE DIFFERENTIALS
The euro had lost ground after Moody's slashed Greece's debt rating by three notches and kept it on review for a further possible downgrade, though the falls proved short-lived.
"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.
In an interview published on Monday, ECB Executive Board member Jose Manuel Gonzalez-Paramo said an April rate increase was possible as the central bank continues its mission to control inflation.
The ECB's stance is in contrast to the U.S. Federal Reserve, which is expected to keep monetary policy loose for some time as it stays more concerned about the outlook for growth than about inflationary pressures.
"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 signaling 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 115.06, 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. (Additional reporting by Ian Chua in Sydney; Editing by Patrick Graham)