* Euro steady before ECB meeting, near 12-week high
* Hawkish ECB, dovish Bernanke could boost euro further
* But some point to risks of more profit-taking in euro
* Sterling at 12-week high on UK rate outlook
By Jessica Mortimer
LONDON, Feb 3 (Reuters) - The euro was steady, hovering not
far below a 12-week high on Thursday as the market awaited a
European Central Bank meeting and news conference, where hawkish
comments could give it a further boost.
The euro could gain even more if Federal Reserve Chairman
Ben Bernanke, who is due to speak only a few hours after ECB
chief Jean-Claude Trichet, reaffirms the bank's policy is still
focussed on boosting growth.
However, some suspect expectations of hawkish ECB rhetoric
may have built up too much, leaving room for disappointment and
posing downside risks for the single currency.
Market players will be looking for any hints on when euro
zone interest rates might rise, given Trichet's recent warnings
on the need to tackle inflationary pressures. Accelerating
inflation and funding problems for peripheral banks are set to
top the agenda at the meeting. []
"The market is looking for confirmation of a more hawkish
Trichet, though the risk/reward is that there is the potential
for disappointment," said Lauren Rosborough, currency strategist
at Westpac.
The euro dipped 0.1 percent to $1.3790 <EUR=>. It slipped on
profit-taking after marking a 12-week high of $1.3862 on
Wednesday, though it is more than 7 percent above a four-month
trough of $1.2860 hit less than a month ago. Traders cited talk
of an options barrier at $1.3900.
Rosborough said further gains could leave the euro on track
to test $1.40, but falls due to Trichet disappointment, or from
any safe-haven dollar buying due to concerns about unrest in
Egypt, could push it towards last week's low around $1.3530.
The ECB announces its policy decision at 1245 GMT, with a
news conference at 1330 GMT. Market players were also wary ahead
of auctions of Spanish and French debt.
"I think the market expects the ECB to be hawkish. But as
the euro has already risen quite a lot, market players are
cautious about chasing it higher," said Tsutomo Soma, a manager
of foreign bonds at Okasan Securities in Tokyo.
Similar risk also exists for the speech from the Fed chief,
due at 1730 GMT, if he turns out to be less dovish than many
market players have hoped.
Many market players do not expect the speeches from the
world's two most influential central banks to change the
perception that the ECB will be way ahead in raising rates.
The dollar index <.DXY> was steady at 77.147, near a 12-week
low of 76.881.
RATE FOCUS
Growing expectations that high inflation could force the
Bank of England to raise interest rates sooner rather than later
pushed sterling to a three-month high versus the dollar of
$1.6245 <GBP=D4>.
The Australian dollar <AUD=D4> also performed well after
strong Australian trade data [], rising 0.5 percent
to $1.0133, though the New Zealand dollar <NZD=D4> fell 0.6
percent after weak New Zealand jobs numbers. []
While interest rate differentials are seen playing a big
role in currency transactions, one currency pair that has seen a
breakdown in correlation with yields is the dollar/yen, which
was steady at 81.78 yen <JPY=>.
The yield on U.S. two-year notes, which had strong
correlation with dollar/yen moves last year, has almost
completely lost its link to dollar/yen in the past month.
"The market seems to no longer be looking at yield gaps.
What's we are seeing is that investor buying of bonds is
dwindling. Instead, their money seems to be heading for
commodities," said Katsunori Kitakura, chief dealer at Chuo
Mitsui Bank in Tokyo.
(Additional reporting by Hideyuki Sano in Tokyo; Editing by
Toby Chopra)
