* US dollar index rises from 10-month lows
* Extended positioning limit dollar’s downside
* Uncertainty whether QE2 has been fully priced in (Updates prices, adds quote, details, adds byline)
By Wanfeng Zhou
NEW YORK, Oct 18 (Reuters) - The U.S. dollar was little changed against the euro on Monday, erasing early gains, and under pressure from the uncertainty arising over the size of further monetary policy easing from the Federal Reserve.
The downside for the dollar looked limited from here, however, as short dollar positions were extended and the euro faced strong resistance at $1.40, analysts said.
Investors are more certain there will be more easing after Federal Reserve Chairman Ben Bernanke on Friday offered his most explicit signal yet that the U.S. central bank was set to ease monetary policy further though the question remains the amount. For details, see [ID:nN15187998]
“After the news (Bernanke comments) came out that the Fed most likely will be engaging in some quantitative easing next month, people took that as a sign to finish out their short dollar trades,” said Brendan McGrath, manager of business solutions at Custom House, a Western Union company, in Victoria, British Columbia.
The euro was 0.1 percent higher on the day at $1.3988 EUR=, but down from a more than eight-month high of $1.4161, hit on trading platform EBS on Friday EUR=EBS. The session low on Monday was $1.3830 on EBS.
Next downside targets are technical support at $1.3825 and then the Oct. 12 low of $1.3775.
Traders said much of the day’s action in the euro was technical after the breach of the $1.3850 level wasn’t sustained. The rise from the low began in London trading.
Analysts also cited a narrowing of spreads between 10-year U.S. and German yields in favor of the euro.
Investors “have not really changed their positive underlying view of the euro,” said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey.
Data from the U.S. Commodity Futures Trading Commission showed speculators trimmed bets against the dollar in the latest week but still had hefty wagers against it. [IMM/FX] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Graphic on net U.S. dollar long positions r.reuters.com/kus26k ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
The dollar index .DXY was little changed at 77.032, after rising to 77.645. The rally needs to extend above its Oct. 12 high of 77.93 to signal a short-term bottom is in place after Friday’s 10-month trough of 76.144, analysts said.
The index has lost nearly 5 percent in the past month as investors increased their bets against the dollar on heightened market expectations for the Federal Reserve to unveil a second round of quantitative easing as early as November.
Atlanta Federal Reserve bank president Dennis Lockhart said on Monday, the U.S. economy is weak enough to warrant further monetary easing by the Federal Reserve, though such a policy carries risks and should not be taken lightly.[ID:nN18167666]
This compounded the calls by two more Fed officials over the weekend, who joined Bernanke in arguing for further aggressive action as U.S. inflation unexpectedly slowed in September even as retail sales picked up.[ID:nN16208445]
The dollar ceded ground against the yen, falling 0.3 percent to 81.21 yen JPY= and edging back toward a 15-year low of 80.88 hit on EBS last week JPY=EBS. Traders reported sovereign demand around the 81.15 level.
The Australian dollar recovered from the day's declines and was last up 0.1 percent to $0.9915 AUD=D4. The Aussie rose to $1.0004 on Friday, but hit a low of $0.9801 on Monday after some macro funds sold, with traders citing decent stop-loss orders at $0.9780.
Additional reporting by Nick Olivari Editing by Theodore d'Afflisio