* Fed's cautious economic view weighs on dollar
* Euro resistance looms at $1.3740-3786
* Dollar index near 10-week low
By Hideyuki Sano
TOKYO, Jan 27 (Reuters) - The euro clung near a two-month
high on Thursday after the Federal Reserve showed it was in no
rush to scale back its easy policy, leaving the European Central
Bank's stance looking comparatively hawkish.
The contrast between the Fed's emphasis on efforts to cure
high unemployment and the ECB's growing concern about inflation
could keep the euro in an uptrend from a four-month low hit
earlier in the month.
Still, the currency's two-week-long rally faces a growing
risk of overstretching in the near term with resistance seen
looming around $1.3740-3786, analysts said.
The euro held flat at $1.3710 <EUR=> on Thursday, still
within sight of a two-month high of $1.3723 marked on Wednesday
and an option barrier said to be around $1.3725.
Its near-term resistance includes a 61.8 percent retracement
of its two-month decline until early January, around $1.3740, as
well as its Nov. 22 high of $1.3786.
The Fed voted unanimously to hold interest rates steady and
repeated that rates would remain exceptionally low for an
extended period, offering only a very slight upgrade to its
assessment of the U.S. economy.
"The Fed didn't really stress an improvement in the economy.
Because some market players had speculated that the Fed could
become more hawkish, the dollar slipped back," said Masafumi
Yamamoto, chief FX strategist at Barclays Capital.
ECB Governor Jean-Claude Trichet may also take a clear
stance on exiting the bank's current easy policy after a meeting
next week, likely giving the euro fresh impetus, said Daisuke
Uno, chief strategist at Sumitomo Mitsui Banking Corp.
Uno said the euro was likely to rise to around $1.38-39 some
time next week, noting that a break of its Nov. 22 high of
$1.3786 would probably push the euro into a new trading range
around $1.38-40.
But in the very short term the euro may peak on Friday, he
said, noting that by then the currency's uptrend will have
lasted nine business days -- the average length for its recent
uptrends.
The euro's rally even from a four-month low of $1.2860 set
on Jan. 10 has come without a major adjustment, it having risen
in 12 of the last 13 sessions.
And the last few sessions have seen it forming a rising
wedge on the charts. This is a bearish pattern, normally
associated with the imminent reversal of a prevailing trend.
On some crosses the euro is already starting to lose steam.
The euro slipped to around 1.2919 franc <EURCHF=R> from a
six-week high of 1.3068 hit on Friday and again on Monday.
Against the yen, it has been blocked at resistance around
113 yen <EURJPY=R>.
The euro has been helped by signs of some stability in euro
zone periphery countries' bond markets but many market players
also say doubts remain on whether these nations can stand on
their own feet.
The dollar changed hands at 82.20 yen <JPY=>, showing little
sign of breaking out of its recent 82.00-83.50 yen range.
Strong bids at and below 82 yen, including buying related to
an options barrier at 82 yen, are keeping its decline in check,
traders said.
But if the currency breaks below 81.85, a low hit last week,
many traders are likely to shake off entrenched expectations of
rangebound trade.
The dollar also failed to capitalise on a rise in U.S. bond
yields after the Fed. The correlation between U.S. two-year
yields and the dollar/yen rate has completely broken down since
late last year.
"A breakdown in the correlation happens from time to time so
it's not a surprise. But it does indicate waning demand for the
dollar now," said Tohru Sasaki, chief strategist at J.P. Morgan
Chase.
Sasaki said this reflected broad weakness in the dollar, as
safe-haven dollar demand is waning due to favourable global
market conditions.
The dollar index against a basket of major currencies <.DXY>
<=USD> hovered at 77.739, just above a 10-week low of 77.689 hit
on Wednesday.
The Australian dollar fell 0.3 percent <AUD=D4> after
traders used an announcement of a new temporary tax to fund a
rebuilding programme after devastating floods in the country as
an excuse to sell the currency. []
Still, the Aussie has been stuck in a rough range between
$0.98 and $1.02 since the start of the year.
The currency's slide cut into gains in the New Zealand
dollar, which had risen to a one-week high of $0.7746 <NZD=D4>
earlier after the Reserve Bank of New Zealand said rates were
still likely to climb over the next couple of years.
(Additional reporting by Ayai Tomisawa, Editing by Michael
Watson)
