* Dollar index at 3-1/2 mth low; euro supported before ECB
* Fed's Bernanke expected to confirm policy will stay loose
* Euro targets 2011 high of $1.3862 and $1.3948 resistance
* Sterling hits 13-month high vs dollar, CAD at 3-year high
(Updates prices, adds detail)
By Jessica Mortimer
LONDON, March 1 (Reuters) - The dollar hit its lowest in
three-and-a-half months versus a currency basket on Tuesday on
the view U.S. monetary policy will remain loose, as the market
awaited testimony by Federal Reserve Chairman Ben Bernanke.
With other central banks seeming likely to hike interest
rates, analysts said the dollar could extend falls if Bernanke
stays cautious about the economy and relatively relaxed about
inflation at his semi-annual appearance before the Senate
Banking Committee, starting at 1500 GMT.
Meanwhile, expectations of higher rates in the euro zone and
UK pushed the euro close to its 2011 high against the dollar of
$1.3862 and sterling to its highest in more than a year.
The euro was expected to remain supported ahead of
Thursday's European Central Bank policy meeting, at which it may
signal a willingness to raise rates. []
"Interest rate differentials are likely to continue to drive
markets, and although Bernanke should acknowledge improvements
in the economy he is unlikely to change his stance in the short
term," said Richard Falkenhall, currency strategist at SEB in
Stockholm.
The dollar index <.DXY>, which tracks its performance
against a basket of major currencies, fell to 76.735, its
weakest level since early November.
The euro was up 0.1 percent at $1.3817 <EUR=>, close to a
one-month high of $1.3857 hit on trading platform EBS on Monday.
A break of its February high just above there, at around
$1.3862, would mark the currency's highest since early November.
Traders reported stop losses above $1.3860, while technical
analysts said there was key resistance around $1.3948, the 76.4
percent retracement of the euro's fall from November to January.
"Upside in euro/dollar is likely to depend on Bernanke. The
first level is the 2011 high, and once this breaks we could see
a test of $1.40 but for this to happen we would need (ECB
President Jean-Claude) Trichet to be quite hawkish on Thursday,"
said Roberto Mialich, currency strategist at Unicredit in Milan.
Traders said the single currency could struggle to extend
gains without a further catalyst, however, with offers reported
around $1.3865-70 and barriers at $1.3900, $1.3950 and $1.4000.
Sterling <GBP=D4> rallied to a 13-month high against the
dollar of $1.6330, supported by firm UK data [] and
market expectations the Bank of England will raise interest
rates before the Fed. It later eased back to $1.6269, up 0.1
percent on the day.
The Canadian dollar <CAD=D4> also hit a three-year high of
C$0.9699 per U.S. dollar, taking out an option barrier at
C$0.9700, helped by high oil prices and broad weakness in the
greenback.
YEN DIPS
The dollar was steady against the Swiss franc and was able
to rally against the yen as concern about North Africa and the
Middle East eased in the absence of any significant escalation
of tensions and oil prices stayed below last week's highs.
Uncertainties in the region remained, however, and analysts
said that if tensions heighten investors could again buy the
Swiss franc and yen, the two currencies which have tended to
benefit most when market players have sought safety.
Versus the yen <JPY=>, the dollar rose 0.4 percent to 82.09
yen <JPY=>, hovering near the middle of its roughly 81 yen to 84
yen range seen over the past month. Traders earlier cited heavy
buying of dollar/yen by Japanese exporters.
The Australian dollar <AUD=D4> flat on the day at $1.0184,
close to a two-month high of $1.0203 hit in Asian trade which
could leave it poised to test the multi-decade high of $1.0257
hit late last year. Earlier, the Reserve Bank of Australia kept
interest rates unchanged at 4.75 percent, as expected.
[]
(Additional reporting by Neal Armstrong; Editing by Catherine
Evans)
