LONDON (Dow Jones)--The euro declined in European trading hours Monday after hitting two-month highs against the dollar and the Japanese yen overnight, reflecting a lack of conviction in the common currency's sparkling two-week rally. The 17-country currency rallied strongly in Asian hours, building on gains from last week, after European Central Bank President Jean-Claude Trichet warned in a Wall Street Journal interview that the central bank is prepared to respond to inflationary pressures with higher interest rates, despite economic weakness in Greece and Ireland. The comments reinforce the more hawkish tone of the ECB that first emerged earlier this month, pushing the euro up to $1.3648 against the dollar and to Y112.70 against the yen. News that Ireland's Green Party had quit the ruling coalition had little impact, though it was cited as a factor after the euro came off its highs in the London session. "It seems that, at least for now, investors are willing to respond to euro positives and largely ignore euro negatives," said Valentin Marinov, a currency strategist at Citigroup. German Finance Minister Wolfgang Schaeuble also added to the upbeat tone, as he said that a package to improve the European Financial Stability Fund will be finalized soon. The data flow was largely positive from Europe, with activity in Germany's private sector accelerating to another four-and-a-half year high, while euro-zone private sector activity also grew at the fastest rate in six months. Euro-zone industrial orders were in line with expectations in November, registering growth of 2.1% on month and 19.9% on the year. However, market watchers remain cautious of buying into a sustained euro rally, ahead of a slew of first-tier data due in the week and as U.S. Treasury yields continue to rise. "The market is assuming that some of the anxiety surrounding the euro-zone debt crisis has subsided, but we remain very, very cautious as we could be nearing the end of this rebound in the euro," said Ian Stannard, a currency strategist at French bank BNP Paribas in London. Stannard added that the turning point for the euro could come from the U.S. No data are due Monday, but the Federal Open Market Committee meets Wednesday to decide on interest rates, while the first estimates of fourth-quarter U.S. gross domestic product first are due Friday. In Europe's emerging markets Monday, Turkey's central bank raised the reserve requirements on banks Monday in an effort to rein in booming domestic lending and offset the inflationary impact of last week's cut in the benchmark interest rate. The Turkish lira strengthened some 0.5% against the dollar, which sank to TRY1.5666 from TRY1.5746 before the announcement.

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