* Trade thin due to Christmas holidays
* Yen hits 3-week high vs dollar in erratic trade
* Chance of further China tightening could weigh on Aussie
By Hideyuki Sano
TOKYO, Dec 27 (Reuters) - The Australian dollar dipped on
Monday after China's central bank raised rates at the weekend,
and some analysts say the chance of more tightening in China
could prompt investors to sell the Aussie after the year-end
holidays.
The yen also hit a three week high against the dollar,
although thin trading conditions are likely to have exaggerated
price moves.
While the market had been expecting Beijing to tighten
further, the timing was a surprise as there had been doubts
whether it would raise rates before the end of the year.
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Saturday's move by the Chinese central bank to raise interest
rates was the second in just over two months, underscoring its
desire to dampen domestic demand and get price pressures under
control.
Australia has benefited from strong Chinese demand for iron
ore and other commodities.
The news knocked the Australian dollar as low as $0.9987
<AUD=D4> in thin, erratic trade, with many of the region's
financial centres on holiday, including Sydney and Hong Kong.
The currency later recouped some of its losses to trade at
$1.0035, down 0.2 percent from around $1.0053 late on Friday and
a six-week high of $1.0067 the day before.
"China looks set to tighten its policy further in the next
year, which will have a negative impact on the Aussie given
Australia's strong economic ties with China. When many investors
come back from holiday next week they may start the year by
selling the Aussie," said Yuki Sakasai, a foreign exchange
strategist at Barclays Capital.
While Australia's relatively sound fiscal position, its
strong growth and higher yields are likely to lure investors, the
Aussie may come under pressure particularly against other
commodity currencies such as the Canadian dollar, Sakasai said.
But other traders saw any dip in the Aussie only as a good
bargain-hunting opportunity, as has been the case since early
2009.
"I guess the market is growing immune to China's credit
tightening. Today the Aussie fell just because there aren't many
players around," said a trader at a Japanese brokerage house.
THIN CONDITIONS
Thin trading conditions are expected to persist for the rest
of the week due to various holidays in many countries. London is
closed on Monday and Tuesday while Tokyo will be shut on Friday.
The dollar slipped slightly against the Japanese yen,
touching a three-week low of 82.75 yen <JPY=> in thin trade.
Although stuck in a range of 82.50 to 84.50 yen, the dollar
has been ticking down in the past couple of weeks as holders of
long positions have given up hopes of pushing it beyond 85 yen.
Offers by Japanese exporters kept the dollar in check and
some traders see those offers potentially weighing on the U.S.
currency this week.
"A sharp rise in U.S. bond yields earlier this month has
prompted many traders to bet on a rise in the dollar. But as the
dollar was unable to extend gains, traders have been cutting long
positions," said Katsunori Kitakura, chief dealer at Chuo Mitsui
Trust Bank.
The dollar/yen rate has had a high correlation with U.S. bond
yields, particularly for two-year notes, but the relationship has
weakened this month.
Last week it broke down as the two-year U.S. yield rose more
than 5 basis points while the dollar fell 1 yen.
But many traders attribute that to illiquid year-end market
conditions and expect the correlation to return when market
players are back from holiday.
An auction of $35 billion in two-year U.S. Treasuries later
in the day will be closely watched for clues on where U.S. bond
yields may be headed after a volatile month in the bond market.
Support for the dollar is seen around 82.60 yen, its 55-day
moving average, and then around 82.40 yen, the bottom of a daily
ichimoku cloud as well as the tenkan line on the weekly ichimoku
chart.
But the bottom of the cloud is expected to gradually rise
later in the week, rendering it thinner towards early January and
pointing to a higher risk of the dollar falling below the cloud.
That would be considered a major bearish signal.
The euro ticked up 0.2 percent to $1.3144 <EUR=>, although it
had dipped slightly when traders successfully gunned for
stop-loss orders around $1.31.
The euro looks vulnerable due to worries over some euro zone
countries' problems with debt financing, but the absence of many
market players this week may help the currency hold above last
week's three-week low of $1.3055, traders said.
The euro has been supported at its 200-day moving average,
which stood at $1.3093 on Monday.
(Editing by Edmund Klamann)
