* Dollar index <.DXY> slides to 3 1/2-mth low of 76.812
* High oil prices likely to keep Fed policy loose
* Expectations of a hawkish ECB supports euro
(Adds quote, detail, updates prices)
By Naomi Tajitsu
LONDON, Feb 28 (Reuters) - The dollar hit a 3-1/2-month low
versus a currency basket on Monday on speculation the Federal
Reserve will lag other central banks in raising interest rates
to counter inflation risks stoked by rallying oil prices.
The dollar index, which tracks the greenback's performance
against a basket of major currencies, skidded to 76.812 <.DXY>,
its lowest level since Nov. 9.
Traders said the move below the February trough of 76.881
had triggered fresh-selling by "model" accounts, which are based
on computer-generated trading recommendations.
Analysts said the dollar would stay under selling pressure
ahead of Congressional testimony from Fed Chairman Ben Bernanke
on Tuesday and Wednesday.
Investors suspect he will stick to his recent economic
assessment that the recovery is strengthening but still not
enough to bring about a significant improvement in the jobs
market, suggesting the time is not ripe for U.S. rates to rise.
This would contrast with the European Central Bank, whose
policymakers have been warning against inflation risks. The ECB
holds a policy meeting this week, and some say it may suggest it
is preparing to exit its ultra-loose policy, opening the way to
raising rates.
"The Fed has singled itself out among the major central
banks in deciding to maintain very accommodating monetary policy
despite improving data," said Adam Myers, senior currency
strategist at Credit Agricole.
"The market is anticipating Bernanke will maintain his line
from his testimony two weeks ago. If that's the case, it would
put the Fed in a very different light to all other G10 central
banks, and that is the main dollar driver."
While ECB officials have focussed on the impact of higher
inflation, the Fed is keeping an eye on growth and have set a
high bar for tweaking their $600 billion bond buying program.
The euro <EUR=> rose around 0.6 percent versus the dollar to
$1.3845, its strongest since the start of the month. Technical
analysts said a break of the euro's year-to-date high at $1.3862
was needed for added momentum.
Traders said a UK clearer was a heavy buyer of euros through
the morning, while offers were cited ahead of an option barrier
at $1.3850.
Along with the view that rock-bottom U.S. rates will tarnish
the appeal of U.S. assets, the dollar has been stung by rising
oil prices as investors fret the U.S. economy is more vulnerable
to higher energy costs, given its strong reliance on consumer
spending for growth.
Oil prices rose more than $1 per barrel on Monday as
protests in Oman fuelled wider concern about security of supply
from the Middle East after uprisings in Libya dramatically
reduced exports from North Africa. []
"The ECB sees rising crude as an upside risk to inflation
rather than the Fed's view that it will be negative for growth.
This is increasing the risks of a near-term overshoot for the
euro," said Lee Hardman, currency analyst at BTM-UFJ.
High inflation risks were highlighted by data showing final
euro zone inflation data for January came in at 2.3 percent
year-on-year, slightly softer than estimates but hovering at a
27-month high. []
"The dollar is likely to stay weak for now as investors
expecting central banks to hike rates in response to higher oil
prices favour the euro, pound and Swedish krona," said UBS FX
analysts in a note.
Still, an ongoing rise in the euro could make the single
currency susceptible to profit-taking as the latest data showed
currency speculators had boosted bets in favour of the euro to
the highest since October in the week ended Feb. 22. []
The dollar was flat against the Swiss franc at 0.9285 francs
<CHF=>, near a record low of 0.9229 hit on EBS last week.
The safe-haven Swiss currency has rallied this month on
concerns that uprising in Egypt and Libya could spread to other
countries in the Middle East the North Africa.
The dollar was steady at 81.88 yen <JPY=>. Traders reported
a layer of strong bids down to 81.00 cushioning the dollar.
(Additional reporting by Neal Armstrong; Editing by Ron Askew)
