* Euro erases gains on report Weber out of race to head ECB
* Dlr up vs yen and Swiss franc as higher U.S. yields help
* Markets await Fed Bernanke's testimony
(Recasts with euro, adds details, quote, details)
By Anirban Nag
LONDON, Feb 9 The euro gave up its gains against
the dollar on Wednesday after sources said Bundesbank head Axel
Weber will not be a candidate to replace Jean-Claude Trichet as
President of the European Central Bank.
The dollar also climbed against the yen and the Swiss franc
on Wednesday, boosted by rising U.S. yields, while a sanguine
reception from investors to China's latest rate hike helped the
Australian dollar stay above parity.
The euro EUR= fell to a session low of $1.3609 from around
$1.3645 before the news and was last trading at $1.3633, flat
for the day.
Weber, who had been considered a front-runner to succeed
Trichet when his term expires in October, is regarded as a hawk
on inflation but often finds himself in the minority.
"He had a fairly hawkish line, and these views may not have
reflected the ECB's and have not helped him," said Steve Barrow,
head of G10 currency research at Standard Bank.
"This news has come as a surprise to many, which is why the
euro dipped. But it has held reasonably well, which suggests
there is underlying support."
The euro hit a three-month high of $1.3861 last week on
mounting expectations the ECB would raise interest rates later
this year. Those expectations were reined in after Trichet
sounded less hawkish than many were expecting when the board
kept rates on hold at its monthly meeting last week.
Still, investors are pricing in chances that the ECB will
move to raise rates ahead of the U.S. Federal Reserve. Attention
will turn next to Fed Chairman Ben Bernanke's testimony at 1500
GMT to the House Budget Committee.
"We expect him to repeat his concerns over unsustainable
U.S. debt trends, but also that low rates are appropriate for
the time being," said Chris Turner, chief currency strategist at
Bernanke will be giving testimony as the U.S. 10-year
Treasury yield hovers at nine-month highs US10YT=RR. That has
moved yield differentials in the dollar's favour and was lending
it support, especially against the yen, traders said.
Against the Japanese currency, the dollar gained 0.3 percent
to 82.60 yen JPY=, recovering from a fall to 81.77 yen on
Tuesday. Traders say the dollar is unlikely to run much higher
as some Japanese investors will have to buy yen ahead of a U.S.
Treasury redemption and coupon payment on Feb. 15.
Some traders cite stops above 82.70 yen.
Traders said the tight correlation between U.S. yields and
the dollar/yen pair was showing signs of re-establishing itself
after having broken down earlier in the year.
Signs of a broadening U.S recovery and some hawkish
commentary from Fed officials have contributed to higher U.S
bond yields this week. Two-year yields have risen around 30
basis points over the last week.
"The rise in US yields seen over the past week,
especially at the short end of the curve, are finally
starting to feed through into support for dollar/yen," BNP
Paribas said in a note.
"A break through the initial trend line resistance at the
82.95 level will trigger a dollar/yen bullish signal opening
upside potential towards 85.00."
The dollar was up 0.2 percent on the Swiss franc at 0.9650
francs CHF= having hit a 2-1/2 week high of 0.9660. The next
possible targets for the dollar include the 100-day moving
average at 0.9691 francs and more importantly, its mid-January
peak of 0.9784.
The euro hit a two-month high of 1.3179 francs EURCHF=, up
0.3 percent on the day, with risk appetite holding up reasonably
well despite a hike by the Chinese central bank on Tuesday.
The markets have settled down since China delivered a 25
basis point rate hike late on Tuesday, the second increase in
little more than six weeks. [ID:nL3E7D81F7]
The Australian dollar AUD=D4, highly sensitive to Chinese
interest rate policy as China is the biggest market for its top
exports, iron ore and coal, traded at $1.006 AUD=D4 with
robust support at $1.0083, last Thursday's low.
(Editing by Hugh Lawson)