* Euro extends rise in the wake of ECB comments on inflation
* Talk of hedge fund and Asian central bank buying of euros
* Previous day's dip in US bond yields weighs on dollar
* Kiwi touches two-month low, later pares losses
(Updates price levels)
By Ian Chua and Masayuki Kitano
SYDNEY/SINGAPORE, Feb 23 (Reuters) - The euro edged higher
on Wednesday after European Central Bank officials stressed
their readiness to raise interest rates to fight inflation,
though it was expected to face resistance near $1.3750.
Market players said the euro was supported by buying from
hedge funds and Asian central banks and by short-covering, while
a drop in U.S. Treasury yields the previous day helped weigh on
the dollar.
"The market seems to be short (the euro) after yesterday's
moves and we could see a rise toward such levels (near $1.3750)
on short-covering," said a trader for a Japanese brokerage house
in Tokyo.
The euro rose 0.3 percent to $1.3692 , having bounced
back sharply from the previous day's intraday low of $1.3525.
Luxembourg's Yves Mersch and Nout Wellink of the Netherlands
said on Tuesday the ECB was ready to fight inflation by
increasing interest rates when needed, prompting interest rate
futures to bring forward expectations for a 25 basis point rate
hike to the ECB's Aug. 4 meeting.
"The associated warning about the risks of distortions from
excessively low interest rates might not have been a clarion
call for higher rates, but again highlight the clear divergence
with the approach of the Fed," said David Watt, strategist at
RBC Dominion Securities.
"These comments overshadowed concerns about the EU
periphery."
The euro faces a cluster of resistance points roughly around
$1.3750, namely its Feb. 9 peak of $1.3745 and trendline
resistance drawn off peaks hit in November 2010 and February
that comes in near $1.3765.
The euro has lacked the energy to test such resistance
levels after Germany's main ruling party suffered a crushing
defeat at a regional election on Sunday, making it harder for
Chancellor Angela Merkel to pass federal legislation.
KIWI OFF TWO-MONTH LOWS
A clear break of that resistance area, however, could open
the way for further gains in the euro, with the next major
resistance on charts seen at $1.3862, a three-month peak hit in
early February on trading platform EBS.
"There was that big defeat suffered by Merkel, and there is
an election coming up in Ireland, so the euro still has some
weaknesses," said a trader for a major Japanese bank in Tokyo.
"Even if the euro breaks above $1.3800, I don't get the
sense that it will clear the previous peak near $1.3860. Its
moves are likely remain range-bound," the trader said.
The dollar dipped against the yen, falling 0.2 percent to
82.64 yen .
Weighing on the dollar was talk of dollar-selling by
Japanese investment trusts and market expectations for Japanese
exporters to step up their dollar-selling toward the end of the
month, while talk of bids near 82.50 yen were seen lending the
dollar support.
The Australian dollar rose 0.3 percent to $1.0019 ,
regaining some ground after sliding on heightened risk aversion
the previous day, when revolt in Libya triggered a surge in oil
prices, sparking worries about slower global growth.
The New Zealand dollar rose 0.1 percent to $0.7472 ,
having touched a two-month low of $0.7433 earlier on Wednesday.
The kiwi earlier extended its losses after sliding more than
2 percent on Tuesday, its biggest one-day slide in more than
seven months.
A 6.3 magnitude quake hit New Zealand's second-biggest city
of Christchurch on Tuesday, killing at least 75 people. It was
the country's most deadly natural disaster for 80 years.
Markets have almost completely priced out any risk of a rate
hike over the next 12 months, and have begun bracing for the
possibility that New Zealand's central bank may lower interest
rates.
(Additional reporting by Hideyuki Sano and Yoshiko Mori in
Tokyo, Reuters FX analysts Rick Lloyd and Krishna Kumar; Editing
by Alex Richardson)
