* Euro lacks driver after ECB rate hike prospects dampened
* Fall in U.S. yields has limited impact on dollar
* Aussie drops after Australian jobs data
* Sterling in focus ahead of BoE policy meeting
* Implied vols on euro/dollar, dollar/yen under pressure
By Hideyuki Sano
TOKYO, Feb 10 (Reuters) - The euro slipped against the dollar
on Thursday, pressured by fading prospects for a European Central
Bank rate hike while a boost the previous day from falling U.S.
bond yields proved short-lived, fuelling expectations that it
will stick to its well-worn range.
Traders instead focused on the British pound, which was
well-supported ahead of the Bank of England's policy announcement
at 1200 GMT, as speculation lingered of a surprise rate hike.
The euro, in contrast, lacked momentum after the European
Central Bank chief last week quelled expectations of a near-term
rate hike, which toppled the currency from a 12-week high.
"It's difficult for now for the euro to rise above the peak
it hit earlier this month. It will need a fresh factor to push it
beyond that high," said Keiji Matsumoto, a strategist at Nikko
Cordial Securities.
The euro slipped to $1.3694 <EUR=>, down about 0.3 percent
from late U.S. levels.
Although the fall in U.S. yields helped the currency rise
sharply on Wednesday, it has failed to make a sustainable break
above resistance around $1.3740, a 61.8 percent Fibonacci
retracement of its fall from November to January.
"I expect the euro to stay in a boxed range between $1.35 and
$1.38 for the time being," said Nikko's Matsumoto, reflecting the
view of many market players.
Many traders are also wary about bidding the dollar up too
far after Federal Reserve Chairman Ben Bernanke gave no
indication that the central bank would cut short its bond buying
programme, let alone raise interest rates down the road.
That, combined with strong foreign demand at a 10-year U.S.
bond auction, helped to drive U.S. yields from a nine-month high
and undermined the greenback on Wednesday.
Bernanke, testifying in Congress, acknowledged renewed
momentum in the economy, saying a drop in the jobless rate to 9
percent was grounds for optimism while adding that hiring was
still anaemic.
TREASURY YIELDS
U.S. Treasury yields fell from nine-month highs, with an
auction of 10-year bonds drawing strong foreign demand, helping
to widen the euro's yield advantage over the dollar.
The two-year German-U.S. yield spread, which has had a high
correlation with the euro-dollar rate, rose to 0.64 point from a
three-week low of 0.55 hit on Tuesday.
German bond yields and euro zone short-term interest rates
also climbed despite reports that hawkish ECB policy maker Axel
Weber, the head of the Bundesbank, had pulled out of the race for
the presidency of the ECB. []
"It is true that Weber is one of the most hawkish
policymakers. But the market seems to be leaning to the view that
the ECB's policy direction will not be that different even if
Weber doesn't take the helm," said Masafumi Yamamoto, chief FX
strategist at Barclays Capital in Tokyo.
The dollar rose 0.3 percent against the yen, with buying by
Japanese corporates helping to lift it to a nearly two-week high
of 82.72 yen <JPY=>.
Many traders said that heavy offers from Japanese exporters
as well as repatriation flows from Japanese companies will likely
keep the pair below 83 yen in the near future.
With both euro/dollar and dollar/yen seen in a holding
pattern, some speculators are now selling options in the two
pairs -- essentially betting against sharp moves -- rather than
making directional bets.
That pushed one-month implied volatility on euro/dollar to a
five-month low <EUR1MO=>, while one-month dollar/yen volatility
was flirting with three-year lows <JPY1MO=>.
The British pound held on to Wednesday's 0.2 percent gain to
trade at $1.6100 <GBP=D4>, ahead of the Bank of England's
policy-setting meeting later in the day.
While many currency traders expect the bank to stand pat this
time, money markets are pricing in about a 20 percent chance of a
rate hike on Thursday and a 100 percent chance by May.
[]
Sterling could fall if the Bank of England does not take
action, although expectations of an early hike are likely to
support the pound, some traders said.
"Among major central banks, the Bank of England is likely to
be the first to raise rates," said Sumino Kamei, senior analyst
at the Bank of Tokyo-Mitsubishi-UFJ.
The dollar's index against a basket of currencies stood at
77.789 <.DXY> <=USD>, up 0.2 percent on the day.
The Australian dollar <AUD=D4> fell after jobs data showed
that more jobs than expected were created despite the floods in
Queensland, although full-time employment fell, which some
traders said prompted profit-taking. The Aussie slipped to
$1.0070, down 0.5 percent on the day.
(Additional reporting by Masayuki Kitano; Editing by Edmund
Klamann)
