* Kiwi slides, hits 19-yr low vs Australian dollar
* Euro's upside thwarted by key resistance level
* Losses seen limited ahead of ECB meeting on Thursday
* Bernanke sounds relaxed about inflation
(Updates prices, adds trader comment on euro)
By Ian Chua
SYDNEY, March 2 (Reuters) - The euro fell slightly on
Wednesday after yet again failing to break through a key
resistance level, helping lift the dollar off a 3-1/2 month low
against a basket of currencies.
However, further declines for the common currency may be
limited a day ahead of a European Central Bank meeting. Given
that euro zone inflation is well above the ECB's target, markets
expect the central bank may sharpen its anti-inflation rhetoric.
"We're not likely to see a very deep pull-back in the euro
given the possibility the ECB strikes a very hawkish tone, which
contrast pretty starkly with the Fed," said Sean Callow,
strategist at Westpac Bank.
Federal Reserve Chairman Ben Bernanke told the U.S. Senate
Banking Committee that while he saw increasing evidence the U.S.
economic recovery has enough momentum to become self-supporting,
jobs growth remained far too anaemic.
His comments underscored market expectations the ECB will
probably raise interest rates before the Fed.
Bernanke also said the surge in oil prices was unlikely to
hurt the U.S. economy unless it was sustained. Brent crude oil
hit its highest closing price in 2-1/2 years on Tuesday as more
turmoil in the Middle East and North Africa kept investors on
edge.
The euro fell 0.1 percent to $1.3761 . The euro has
retreated after it failed on Tuesday to clear the one-month high
of $1.3857 it struck on Monday.
Support is seen around $1.3700/10, lows that have supported
the common currency in the past few sessions. A break above
$1.3860 should open further upside potential towards the $1.42
area, BNP Paribas analysts said.
"If there is some type of rhetoric that hints at the
possibility of raising interest rates, market players will
probably jump on that," said a trader for a major Japanese bank
in Singapore, referring to the ECB's policy meeting on Thursday.
Economists polled by Reuters believe the ECB will hold fire
on rates until at least October, but financial markets expect on
earlier hike from the current record low of 1 percent.
EYES ON US JOBS
The euro's dip helped the dollar climb from a 3-1/2 month
trough against a basket of major currencies. The dollar index
last stood at 77.111, up 0.1 percent on the day. It fell
as low as 76.735 on Tuesday, its lowest since early November.
The dollar also rose against the New Zealand dollar, which
slid 0.7 percent to $0.7412 and tumbled to a 19-year
low against the Aussie.
The kiwi fell after New Zealand Prime Minister John Key told
Bloomberg in an interview that he expected New Zealand's central
bank to cut interest rates next week after the devastating
earthquake in Christchurch.
Traders said the drop in the New Zealand dollar was
exacerbated by stop-loss selling, with the Australian dollar
gaining an additional lift against the kiwi after option
barriers were taken out at NZ$1.3650.
The Australian dollar climbed to as high as NZ$1.3669
, the Aussie's highest level against the kiwi since
August 1992. After trimming some gains, the Aussie was up 0.5
percent from late U.S. trading on Tuesday at NZ$1.3611.
The dollar rose 0.1 percent against the yen to 81.93 yen
, having found support at 81.60 in the past few sessions,
after a near three percent slide from around 84.00 in
mid-February.
Still, analysts remain doubtful the dollar will continue to
recover.
"The last chance of a short-covering rally for the USD
likely lies with Friday payroll and the outside risk of an
ISM-like 500k jobs boost," Peter Frank, strategist at Societe
Generale wrote in a client note.
"Worryingly for USD bulls, even a monster payroll may fail
to deliver a USD rally as the bar has been raised very high
thanks to record strength already being seen in European PMIs,
and Germany itself enjoying a surprise slump in February
unemployment data."
Data on Tuesday showed U.S. manufacturing grew in February
at its fastest rate in nearly seven years, while the euro zone's
manufacturing sector expanded at its best pace in nearly 10
years.
The data supported forecasts for a strong improvement in
U.S. non-farm payrolls due on Friday. Analysts polled by Reuters
expect payrolls to rise by 185,000, after a tepid 36,000 rise in
January.
(Additional reporting by Masayuki Kitano in Singapore and
Hideyuki Sano in Tokyo; Editing by Daniel Magnowski)
