Morgan Stanley on Monday revised its outlook for the euro sharply as the European Central Bank (ECB) last week had hinted at interest rate hike in April.

We are no longer bearish on the euro over the course of 2011, The Wall Street Journal reported, quoting the investment bank.

The firm expects the euro to trade around $1.3800 in the first quarter of 2011 compared to its previous estimate of $1.3200. It predicts the euro to trade at $1.4300 in the second quarter and $1.4500 in the last quarter of 2011.

On Monday, euro hit a 4 month high against dollar to trade at $1.4014. The Dollar index hit a 4 month low at 76.233.

The bank also expects the euro to face some near-term headwinds from sovereign debt crisis in Europe. However, it expects the euro to gain strongly once the monetary tightening starts.

Moody’s Investors Services on Monday downgraded Greece’s sovereign debt rating by three notches from Ba1 to B1 with a negative outlook. The agency said that the country might fail to meet the criteria for support from the International Monetary Fund and the European Union after 2013, citing Greek government’s difficulties in revenue collection.

We expect broad-based gains after ECB rate hikes get underway, most likely in April, the report said.

Similarly, Standard Chartered on Monday said that it would expect the euro to become stronger than its earlier estimate. The financial services firm predicts the euro to strengthen to $1.42 compared to its previous estimate of $1.20 in January, the Euro Exchange Rate News reported.

The US dollar (USD) started the year off on a firm note, supported by stronger economic numbers and, at least initially, interest rate spreads. However, two key factors conspired to stop and reverse the uptrend: oil and the European Central Bank (ECB),” the report said quoting an unnamed currency analyst at Standard Chartered.

With our oil forecasts having been revised substantially higher, we have pushed back our expected USD rally until H2. In the near term, the USD is likely to continue to trade lower against the G10 currencies, particularly against European currencies, where hawkish monetary views are centred, said Standard Chartered.