FOREX-Euro slips 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

By Anirban Nag

LONDON, March 28 (Reuters) – The euro eased on Monday and
could fall toward mid-March lows after a state election loss by
Germany’s ruling party raised doubts about the tackling of
Europe’s debt crisis, while the dollar was aided by hawkish
comments from Federal Reserve officials.

The higher-yielding Australian dollar (AUD=D4: Quote, Profile, Research), hit a
29-year peak of $1.0307, 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
around $1.4250 last week saw some paring in speculative long
positions, although support around $1.4015/35 appeared to be
holding for now with bids by Asian central banks around $1.4030
were also cited.

“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 in the table are moving as we could see positive
dollar sentiment dominate.”

The euro (EUR=: Quote, Profile, Research) was down 0.1 percent to $1.4070, 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.

The euro has support 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 Myer adding that it could drop to
around $1.3850–its low on March 15.

The euro had been due for a pull-back, and the dollar due
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

Merkel’s conservatives lost power in a regional stronghold
on Sunday, with early poll results showing the Greens, buoyed by
Japan’s nuclear crisis, surging to their first premiership in
the Baden-Wuerttemberg state. [ID:nLDE72Q0E6]

Losing two elections in a row in states where there is
normally strong support have cast doubts about whether Merkel’s
policy on Europe has the support of the German people. This
could call into question Germany’s role with respect to the
bailout fund and any future agreements.

This uncertainty could cause peripheral bond spreads to
widen and weigh on the euro this week.

Still, the ECB seems to be on track for a rate hike next
month with Governing Board member Ewald Nowotny on Sunday saying
it wanted to move towards a more “normal” monetary policy
despite recent events in Japan. [ID:nLDE72Q04U]

European Central Bank President Jean-Claude Trichet speaks
at 1300 GMT and is likely to reiterate his hawkish stance
towards inflation.

Meanwhile, the dollar 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 Federal
Reserve President James Bullard, who said on Saturday that
lengthening the ‘extended period’ of low rates could encourage a
liquidity trap. [ID:nL3E7EQ03Q]

“The prospect of further QE is looking ever more remote and
the market is probably still unsure how to respond to liquidity
to withdrawal,” said Geoffrey Yu, currency strategist at USB.

“With key data prints this week expected to offer further
confirmation of improving conditions in the U.S….the stage may
be set for a dollar to once again attempt to recover its growth
currency status.”

The dollar index, which measures the dollar’s value against
a basket of currencies, edged up 0.24 percent to 76.40 (.DXY: Quote, Profile, Research),
pulling well away from a 15-month low of 75.340 set on March 21.

Against the yen, the dollar rose 0.5 percent to about 81.71
yen (JPY=: Quote, Profile, Research), pulling away from a record low of 76.25 yen struck
on March 17, when the yen jumped on stop-loss buying by retail
margin traders and as option barriers were taken out.

(Additional reporting by Natsuko Waki in Tokyo and Ian Chua
in Sydney; Editing by Toby Chopra)

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