FOREX-Euro dips on profit taking as market awaits ECB

* Euro dips before ECB meeting; still near 12-week high

* Hawkish ECB, dovish Bernanke could boost euro further

* But some point to risks of more profit-taking in euro

* Stg at 3-mth high vs dlr as strong data boost rate outlook

By Jessica Mortimer

LONDON, Feb 3 (Reuters) - The euro dipped against the dollar on Thursday as investors took profits ahead of a European Central Bank meeting, but analysts said hawkish rhetoric from the bank could lift the single currency back towards a 12-week high.

The euro could gain even more if U.S. Federal Reserve Chairman Ben Bernanke, who is due to speak at 1730 GMT, reaffirms the Fed's focus on boosting growth, reinforcing expectations the ECB will be ahead of the Fed in raising rates.

Analysts said an upward revision to a euro zone services PMI and lower yields at a Spanish debt auction were positives for the euro, but the focus on the ECB meant the euro barely reacted. [ID:nSLA2DE7OZ][ID:nMDT009693]

Market players will be looking for hints on when euro zone interest rates might rise, given ECB President Jean-Claude 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. [ID:nLDE70U0HK]

"The euro is range-trading below $1.38 but it could get a lift from the ECB press conference if Trichet sounds more bullish," said Stephan Maier, currency strategist at Unicredit in Milan.

He said it would be difficult for the ECB chief to tone down his recent warnings on short-term inflationary pressures, given data has shown inflation accelerating in the euro zone.

The euro dipped 0.2 percent to $1.3777 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.

Ahead of $1.40, the euro faces resistance around $1.3950, marking the 76.4 percent retracement of its two-month decline to early January as well as its 200-week moving average.

The ECB announces its policy decision at 1245 GMT, with Trichet's news conference due to start at 1330 GMT.

The dollar index .DXY was up 0.1 percent at 77.216, though not far above a 12-week low of 76.881.

Unicredit's Maier said investors may be taking a more neutral position on the dollar after its hefty losses earlier in the week, given the political turmoil in Egypt and the risks of unrest spreading to other Middle East countries.

ECB AWAITED

Some analysts warned that expectations of hawkish ECB rhetoric may have built too much, leaving room for disappointment and posing downside risks for the euro.

"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.

She 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.

Euro/dollar implied volatility for one-month EUR1MO= inched up to 11.75 percent from around 11.45 percent on Wednesday, but one options trader says there has been little interest in topside protection.

Elsewhere, sterling hit a three-month high against the dollar GBP=D4 of $1.6279 after strong UK services PMI data bolstered the case for higher interest rates. [ID:nSLA2DE7OU]

The Australian dollar AUD=D4 was up 0.5 percent at $1.0127 after strong Australian trade data [ID:nL3E7D22KN], though the New Zealand dollar NZD=D4 fell 0.7 percent after weak New Zealand jobs numbers. [ID:nL3E7D3052]

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 up 0.15 percent at 81.69 yen JPY=.

"The market seems to no longer be looking at yield gaps. What 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 and Susan Fenton)