* DXY breaches resistance, sets sights on 78.90
* Dollar takes breather after surging on China rate rise
* Euro has major support near $1.3580
* Shanghai shares rise, cross/yen pairs stabilise
By Masayuki Kitano
TOKYO, Oct 20 (Reuters) - The dollar dipped against a basket
of currencies on Wednesday, trimming gains it made after a
surprise rate hike by China spurred the market to lower risk
exposure, but was seen likely to stay supported due to the
potential for further short-covering.
The dollar index dipped 0.2 percent to 78.011<.DXY> <=USD>
after climbing more than 1.6 percent the previous day.
But its breach of resistance near 77.93, its Oct. 12 high,
and through 77.894, a 23.6 percent retracement of its
August-October slide, could pave the way for a move to the
78.96-98 area, which would be a 38.2 percent retracement of that
August-October drop.
Investors had increased their bets against the dollar in
recent weeks on heightened market expectations for the Federal
Reserve to unveil a second round of quantitative easing as early
as November.
That positioning had pointed to chances of a short-covering
bounce in the dollar.
"I get the sense that the dollar could rise further in the
near term," said Hideki Amikura, deputy general manager for
Nomura Trust and Banking's foreign exchange section.
"Market moves fuelled by excessive liquidity stemming from
the United States may be drawing to a close," Amikura said.
One supportive factor for the dollar is that some Fed
officials seem to be trying to prevent market players from too
aggressively factoring in prospects of additional U.S.
quantitative easing and its potential impact, Amikura said.
A string of Federal Reserve officials indicated on Tuesday
that the central bank will soon offer further monetary stimulus
to the economy, with one saying $100 billion a month in bond
buying may be appropriate. []
But some internal resistance to the unconventional policy was
still evident, and Federal Reserve Governor Elizabeth Duke said
more easing at the Fed's November meeting is not a done deal.
[] []
The commodity-sensitive Australian dollar rose 0.5 percent to
$0.9754 <AUD=D4> regaining a bit of ground after sliding more
than 2 percent on Tuesday.
The Australian dollar has pulled back after climbing to
$1.0004 late last week, its first rise above parity since the
currency was floated in 1983.
"Given that the Aussie and euro have risen so sharply since
September, I wouldn't be surprised if they face more correction
in the near term," said a trader at a Japanese bank.
CHINESE SHARES RISE
Investors had trimmed some of their risk-taking positions on
Tuesday after China raised interest rates by 25 basis points in
its first tightening in nearly three years.
The move spurred concerns that it could mark the start of a
more aggressive phase of monetary tightening, dampening Chinese
and global growth and denting China's voracious demand for
commodities. []
Traders had fretted that the yen could strengthen broadly if
Chinese and Asian shares were to fall sharply, but as it turned
out Chinese shares rose 0.8 percent <> after having fallen
initially.
The Australian dollar edged up 0.3 percent against the yen to
79.33 yen <AUDJPY=R>, with one trader citing Aussie/yen buying by
Japanese investors.
Some analysts said the market's reaction the previous day was
overblown, and with the Federal Reserve set to ease monetary
policy further as early as next month any dollar rebound would be
short-lived.
"What I think will be short-lived is the weakness in Asian
and commodity currencies in particular," said Greg Gibbs, a
strategist at RBS in Sydney.
"I don't think the hike in China is too significant in terms
of actually slowing down growth there. I wouldn't view that as a
factor to be getting bearish on risk or bearish on Asian growth."
The euro rose 0.3 percent to $1.3773 <EUR=>, edging up after
its 1.6 percent slide the previous day.
The euro has major support near $1.3580, a 38.2 percent
retracement of a rise from the Sept. 10 low of $1.2642 to last
Friday's peak of $1.4161.
The dollar dipped 0.3 percent to 81.38 yen <JPY=>.
(Additional reporting by Ian Chua and Reuters FX analyst Krishna
Kumar in Sydney and Hideyuki Sano in Tokyo; Editing by Michael
Watson)
