* Euro supported by expectations of ECB rate hike signals
* Some market players think room for disappointment
* Middle Eastern buying supporting euro
* Dollar broadly weak as oil prices near 2-1/2 year peaks
By Hideyuki Sano
TOKYO, March 3 (Reuters) - The euro hovered near a
four-month high against the dollar on Thursday on expectations
the European Central Bank will move towards an eventual rate
hike, though the currency faces a near-term risk of
profit-taking.
With many market players already counting on the central
bank to send strong signals that it will raise rates to counter
inflation, there is a risk the euro will slip after an ECB
meeting on Thursday, some traders said.
Investors have pushed the euro up about 3 percent from a low
hit on Feb. 14 in anticipation that ECB chief Jean-Claude
Trichet will sharpen the central bank's anti-inflation rhetoric
as oil prices continue to soar.
Some market players think the bank will stop supplying
three-month liquidity in the second quarter, switching the
operations back to capped-limit, variable rate tenders -- a step
in the phasing out of crisis support that could lead to a rate
hike.
But others see the chance of the bank extending the measure
in light of lingering worries about bank funding in some euro
zone periphery countries -- an outcome that could push back
market expectations of a rate rise.
"I think the euro rally will fizzle after the ECB today.
There has been a lot of hype in the market on the ECB for some
time, so I expect the euro to lose steam pretty much regardless
of what the ECB does today," said Teppei Ino, currency analyst
at the Bank of Tokyo-Mitsubishi UFJ.
While oscillators such as the RSI do not point to
overheating in the euro's rally now, data showed last week that
speculators' long positions in the euro have soared to their
highest level since mid-October, pointing to the risk of
profit-taking.
Last month the euro's rally peaked at $1.3862 as Trichet
disappointed bulls by not offering new hints of earlier
tightening after the last policy meeting.
On Wednesday, the euro finally broke above that level to hit
a four-month high of $1.3890. It last stood at $1.3858 ,
down 0.1 percent from late U.S. trade on Wednesday.
Immediate resistance is seen at $1.3900, where it has
option-related offers. Further resistance includes $1.3947,
around the 76.4 percent retracement of the euro's fall from
November to January, and $1.3958, the 200-week moving average.
OIL IMPACT
But market players also said the currency's outlook in the
longer term hinges on where oil prices are going, as the U.S.
currency comes under pressure from rising oil prices.
"If U.S. crude prices hit $110 and Brent oil prices hit
$120, I'm sure the euro will be above $1.40," said Makoto Noji,
senior FX strategist at Nikko Cordial Securities.
A trader at a Japanese bank also said persistent buying by
Middle Eastern players has recently supported the euro.
"As oil prices are soaring, they probably have more
petrodollars to diversify," the trader said.
The dollar has come under pressure because many investors
believe that higher oil prices will push other central banks to
raise interest rates to combat inflation even as the Federal
Reserve maintains its stimulative monetary policy.
Traders also took a cue from that fact that the dollar had a
negative correlation with oil prices when oil prices jumped in
2007-2008.
The dollar index was steady on the day at 76.704 ,
having dropped to a four-month low of 76.529 on Wednesday.
That drop in the dollar index had come on a day when oil
prices hit their highest settlement price in 2-1/2 years
as Libyan leader Muammar Gaddafi launched a land and air
offensive to retake territory in Libya's east, fighting against
rebels near an oil export terminal.
The dollar now sits near a trendline connecting its 2008
record low and its 2009 low.
"I would expect some buybacks in the dollar at such a level
but we haven't seen much short-covering, which suggests
sentiment on the dollar is really weak," the Japanese bank
trader said.
Another, and perhaps more crucial, trendline support
connecting the record low for the dollar index and its 2010 low
lies at the 76.15-25 area.
Escalating tension in north Africa helped to push the Swiss
franc to a record high of 0.9202 franc per dollar on
Wednesday. The dollar last fetched 0.9247 franc, up 0.1 percent
from late U.S. trade on Wednesday.
The U.S. currency also hit a one-month low of 81.57 yen on
Wednesday, though thick bids around 81.50 yen, possibly
option-related, helped to push it back to 81.85 yen .
(Additional reporting by Reuters FX analyst Krishna Kumar in
Sydney and Masayuki Kitano in Singapore; Editing by Tomasz
Janowski)
(Created by Masayuki Kitano)
