* Euro probes $1.35 as euro zone debt worries return
* Dollar firmer, further gains possible this week
* Yen bounces off 3-week low on Japanese corporate bids
* Aussie dollar up but fails to extend gains on China data
By Ian Chua and Hideyuki Sano
SYDNEY/TOKYO, Feb 14 (Reuters) - The euro teetered at a key
technical level against the dollar on Monday, with a break of
that support seen likely to deepen its decline as markets turn
cautious ahead of a slew of events this week.
Among them, fund-raising by Italy and Spain in the bond
market will be closely watched, especially after Portuguese
government bond yields recently jumped to euro-era highs,
renewing worries about the funding costs of highly indebted euro
zone countries.
The yen bounced back from a three-week low on buying by
Japanese companies, though traders say it looks increasingly
under pressure on charts.
The euro slipped 0.1 percent from late U.S. levels to $1.3526
<EUR=>, struggling to recover above its 100-day moving average at
$1.3542, although it managed to stay above a three-week low of
$1.3497 hit late last week.
A break of $1.35, a level thats widely perceived to be
pivotal, could quickly see a test of $1.3483, which represents a
38.2 percent retracement of its Jan. 10-Feb. 2 rally.
The euro was not hindered by lingering worries over the fate
of Egypt after President Hosni Mubarak was ousted.
There is also uncertainty over who will lead the European
Central Bank after Bundesbank president Axel Weber -- who had
been seen as front-runner to succeed ECB President Jean-Claude
Trichet -- suddenly decided to leave his central banking job.
Still, many market players see the euro as likely to find
some support at $1.33 or above,
"The next level in the $1.33s will hold it. I can't see
anything between the U.S. and Europe which would drive it below
that at this point without some significant deterioration in
conditions in Europe," said Gregg Gibbs, a strategist at RBS.
Some traders also said the euro is being helped by persistent
speculation of buying by Asian central banks.
"On one hand you have rising credit spreads in the euro zone,
but on the other hand many traders see some buying," said
Katsunori Kitakura, chief dealer at Chuo Mitsui Trust and
Banking.
With the euro on the back foot, the dollar was not far from
its highest level in three weeks against a basket of six major
currencies. The dollar index <.DXY> stood at 78.347, compared
with the high of 78.697 hit on Friday.
Versus the yen, the greenback slipped 0.3 percent to 83.16
yen <JPY=> as Japanese exporters took advantage of its rise last
week to a three-week high of 83.68 yen.
Upbeat U.S. data had helped shore up the dollar in the past
few sessions as investors covered short positions
"We're seeing a better trend for the dollar as U.S. economic
numbers are improving," said Gibbs at RBS. A raft of U.S. data is
due this week including retail sales and consumer prices.
Also helping dollar/yen is the fact that the U.S. 10-year real
yield has reached 2.4 percent, the highest within the G10, while
Japan's real 10-year sovereign yield is a more modest 1.2
percent, BNP Paribas analysts said.
Data from the Commodity Futures Trading Commission showed
speculators raised bets against the dollar to the highest level
since October for the week to Feb. 8, meaning there could be
scope for further dollar gains if markets cut short positions.
Japanese investors may sell the dollar from coupon payments
on U.S. Treasuries on Feb. 15 and Japanese firms' repatriation
ahead of the financial year-end on March 31 could cap the dollar,
at least in Asian trade, traders say.
But the dollar looks increasingly firm on charts, having
broken clearly above various moving averages, including its 21-
and 55-day averages, in the past few sessions, with the next
possible target seen at its December resistance around 84.50 yen.
"If the dollar/yen rate breaks above 84.50 yen, that would
change the whole sentiment of the market," a trader at a Japanese
bank said.
Also closely watched this week is a batch of Chinese data
including inflation scheduled for release on Tuesday. Analysts
polled by Reuters expect inflation to have accelerated to 5.3
percent from 4.6 percent.
A stronger-than-expected reading could fuel worries that
China will have to lift interest rates more aggressively,
raising the risk of slower growth.
But talk that Chinese inflation may surprise on the downside
boosted Shanghai shares <> sharply, helping to lift the
Australian dollar 0.3 percent on the day to $1.0055 <AUD=D4>,
Still, the Australian dollar failed to extend gains on data
showing surprisingly strong growth in China's imports in January
-- which some market players took as an ominous sign that the
currency's bull run may be exhausted.
(Additional reporting by Masayuki Kitano in Singapore and
Reuters FX analysts Krishna Kumar in Sydney and Rick Lloyd in
Singapore; Editing by Joseph Radford)
