* State election loss a blow for Germany's Merkel
* Euro eyes support clustered roughly around $1.40
* Breach of such support could open way for $1.39
* But ECB rate hike view seen limiting further downside
* Hawkish comments from some Fed officials help dollar
By Ian Chua and Natsuko Waki
SYDNEY/TOKYO, March 28 (Reuters) - The euro dipped on Monday
after German Chancellor Angela Merkel's conservatives lost a key
state election and it could pull back towards $1.39 in the
near-term, with the dollar supported after hawkish comments from
some Fed officials.
Failure to break through option barriers around $1.4250 last
week also saw some traders pare long exposure to the common
currency, although support around $1.4015/35 appeared to be
holding for now.
"It's being driven by the positioning in the market. Events
in Portugal and German elections injected a little bit of
uncertainty so the first reaction was to sell the euro," said
Robert Reilly, co-head of flow fixed income and currencies at
Societe Generale in Hong Kong.
The euro fell 0.3 percent from late U.S. trade on Friday to
$1.4051, pulling further away from a 4-1/2 month high of $1.4249
hit last week on trading platform EBS.
Earlier on Monday, it was marked down to around $1.4020,
after having triggered stops below $1.4050, with one U.S. bank
cited as the main seller of the euro earlier in the day.
The euro has support at the 20-day moving average near
$1.40, and trendline support around $1.3975, which is drawn
through the euro's Jan. 10 low of $1.2860 and March 11 low of
$1.3752.
A drop through such support could open the way for further
falls, and traders said one-near term target may be $1.39.
The euro had been due for a pull-back, and the dollar due
for a bounce, judging from market positioning.
The latest data from the U.S. Commodity Futures Trading
Commission shows that currency speculators raised the value of
dollar net short positions to $29.82 billion in the week ended
March 22, up from $27.07 billion a week earlier.
DOLLAR HOLDS GAINS
Merkel's conservatives lost power in a regional stronghold
on Sunday, with early poll results showing the Greens, buoyed by
Japan's nuclear crisis, surging to their first premiership in
the Baden-Wuerttemberg state. []
This capped off a barrage of bad news for the euro last week
including the collapse of the Portuguese government, the ensuing
credit ratings downgrade and a delay by euro zone leaders to
increase a rescue fund.
Still, the ECB seems to be on track for a rate hike next
month with Governing Board member Ewald Nowotny on Sunday saying
it wanted to move towards a more "normal" monetary policy
despite recent events in Japan [].
With the common currency subdued, the dollar held on to
Friday's gains sparked by hawkish comments from a regional Fed
official. See []
Philadelphia Federal Reserve Bank President Charles Plosser,
a well-known inflation hawk, said on Friday the U.S. central
bank will have to reverse its easy money policy in the
"not-too-distant future" to avoid sowing the seeds of inflation.
[]
That gave markets a reason to buy the greenback and take
profits on over-stretched positions in other currencies,
although Fed fund futures continue to imply little chance of an
actual tightening for the rest of the year <0#FF:>.
Plosser's comments were supported by St. Louis Federal
Reserve President James Bullard, who said on Saturday that
lengthening the "extended period" of low interest rates could
encourage a liquidity trap. []
The dollar index, which measures the dollar's value against
a basket of currencies, edged up 0.1 percent to 76.324 ,
pulling well away from a 15-month low of 75.340 set on March 21.
Against the yen, the dollar rose 0.6 percent to about 81.78
yen , pulling away from a record low of 76.25 yen struck
on March 17, when the yen jumped on stop-loss buying by retail
margin traders and as option barriers were taken out.
That jump in the yen prompted joint yen-selling intervention
by Group of Seven industrialised nations the very next day, and
one factor limiting the dollar's downside against the yen now is
wariness that Japanese authorities may intervene further if the
dollar were to drop below 80.00 yen.
The higher-yielding Australian dollar was last at $1.0259
, not far from a 29-year peak of $1.0294 hit late last
week. The yen-weakening intervention and stronger risk appetite
were factors underpinning the Aussie's rise.
The Australian dollar was close to breaching resistance
against the low-yielding yen. The Aussie rose 0.7 percent
against the yen to 83.86 yen , nearing its 200-week
moving average that lies at 84.14 yen.
(Additional reporting by Masayuki Kitano and Reuters FX analyst
Rick Lloyd in Singapore, and Reuters FX analyst Krishna Kumar in
Sydney; Editing by Kim Coghill)
(masayuki.kitano@thomsonreuters.com)
RM:masayuki.kitano.thomsonreuters.com@reuters.net))
