FOREX-Euro dips vs dollar, Aussie hits 29-yr high

* State election loss a blow for Germany’s Merkel

* Euro eyes Asian support clustered $1.4030/10

* Hawkish comments from some Fed officials help dollar

(Updates prices, adds quote, details)

By Anirban Nag

LONDON, March 28 (Reuters) – The euro eased on Monday and
could test mid-March lows after Germany’s ruling party lost a key
state election, while hawkish comments by some Federal Reserve
officials lifted the dollar.

The loss by Chancellor Angela Merkel’s conservatives of
Baden-Wuerrtemberg, which they had held for nearly six decades,
led markets to bet Merkel will have less leeway to shore up
financially stricken members of the single currency bloc.

The higher-yielding Australian dollar (AUD=D4: Quote, Profile, Research), hit a
29-year peak of $1.0315, breaking past option barriers at $1.03.
The recent yen-weakening intervention and stronger risk appetite
were factors underpinning the Aussie’s rise, traders said.

For the euro, the failure to break through option barriers
near $1.4250 last week saw some paring of speculative long
positions, although support around $1.4015/35 appeared to be
holding, with bids seen by Asian central banks around $1.4030.

“It is a combination of setbacks to German Chancellor Angela
Merkel’s party and the dollar being lifted by those comments
from Fed officials which led some investors to short the euro,”
said Adam Myers, senior currency strategist at Credit Agricole.

“Those positions could get squeezed out and that could see
the euro rise towards $1.4125, but beyond that looks unlikely.
The chips on the table are moving, as we could see positive
dollar sentiment dominate.”

The euro (EUR=: Quote, Profile, Research) was down 0.2 percent to $1.4060, off a 4-1/2
month high of $1.4249 hit last week on EBS. It fell to around
$1.4020 earlier, after having triggered stops below $1.4050.

Near-term support lies at the 20-day moving average near
$1.40, and trendline support around $1.3975, which is drawn
through the euro’s Jan. 10 low of $1.2860 and March 11 low of
$1.3752.

A drop through such support could open the way for further
falls, with Credit Agricole’s Myers saying it could slip to
around $1.3850, its low of March 15.

The euro had been due for a pull-back, and the dollar for a
bounce, judging from market positioning. Latest data from the
Commodity Futures Trading Commission shows speculators raised
the value of dollar net short positions to $29.82 billion in the
week ended March 22, up from $27.07 billion. [IMM/FX]

DOLLAR MOVING UP

Sunday’s election loss to the Greens, who surged to their
first premiership in Baden-Wuerttemberg, was the second defeat
for Merkel’s Christian Democrats in states usually regarded as
strongholds for the party. [ID:nLDE72Q0E6]

The defeat was blamed on Merkel’s reversal of nuclear policy
following Japan’s nuclear crisis and foreign policy issues, but
could cast doubt on whether Merkel’s policy on Europe has the
support of the German people.

That “could call into question Germany’s role as Europe’s
cash machine with respect to the bailout fund,” said Michael
Hewson, market analyst at CMC Markets, and so hit peripheral
bond spreads and the euro.

Losses in the currency are likely to be limited, however,
with a European Central Bank rate hike still expected next
month. ECB President Jean-Claude Trichet speaks at 1300 GMT and
is likely to reiterate his hawkish stance towards inflation.

The dollar meanwhile held on to Friday’s gains sparked by
hawkish comments from regional Fed officials. [ID:nLDE72O009]

Philadelphia Federal Reserve Bank President Charles Plosser,
a well-known inflation hawk, said on Friday the U.S. central
bank will have to reverse its easy money policy in the
“not-too-distant future” to avoid sowing the seeds of inflation.
[ID:nLDE72O1T3]

Plosser’s comments were supported by St. Louis Fed President
James Bullard, who said that lengthening the ‘extended period’
of low rates could encourage a liquidity trap. [ID:nL3E7EQ03Q]

“Comments from Bullard, who is a cheerleader for
quantitative easing, shows a sea-change as to whether the
endgame for QE2 is approaching,” said Jeremy Stretch, head of
currency strategy at CIBC.

“If we get reasonably supportive ISM manufacturing data and
U.S. payrolls this week, we could see the dollar index testing
its 50-day moving average.”

The dollar index, edged up 0.15 percent to 76.327 (.DXY: Quote, Profile, Research),
pulling away from a 15-month low of 75.340 set on March 21. Its
50-day moving average comes in at 77.285 on Monday.

Against the yen, the dollar rose 0.6 percent to 81.77 yen
(JPY=: Quote, Profile, Research). But gains could run out of steam on steady demand for
the yen by Japanese exporters ahead of the March 31 year-end.

Also, as month-end approaches attention turns to fixing
flows. Citi said in a note, its rebalancing model suggested the
yen may benefit as foreign investors are likely over-hedged
following the sell-off in local equities stemming from the
Japanese earthquake and nuclear crisis.
(Editing by Catherine Evans)

FOREX-Euro dips vs dollar, Aussie hits 29-yr high