Dollar slips before ECB, Aussie hits 17-year high

TOKYO, June 6 (Reuters) The dollar slipped for a third day against the euro on Wednesday as market players awaited a widely expected European Central Bank interest rate increase later in the session and clues on how much higher rates could climb.

The Australian dollar surged to a 17-year peak against the U.S. dollar after robust first-quarter growth data suggested Australian rates could rise further, helping lift the New Zealand dollar to its highest since being floated in 1985.

The hunt for yield has hurt the dollar against currencies whose rates are seen heading higher, while market players have exploited the yen's low borrowing costs to fund purchases of currencies with steep rates in the carry trade.

An ECB rate hike to 4.0 percent has long been expected, so investors are waiting to see if the ECB drops the word ''accommodative'' in describing policy from its statement as a sign the credit tightening campaign is getting closer to an end.

''Some may think that the credit tightening phase is over if the word accommodative disappears from the statement, but I do not think that would be the case,'' said Tohru Sasaki, chief forex strategist at JPMorgan Chase in Tokyo.

Investors are bracing for the ECB to raise rates up to twice more in the next year beyond Wednesday's likely move.

The euro edged up slightly to $1.3527 holding above an eight-week low of $1.3392 hit late last week.

The dollar has come under pressure despite a raft of upbeat economic data reinforcing the view that the Federal Reserve is likely to keep rates steady at 5.25 percent.

Comments from Fed Chairman Ben Bernanke on Tuesday that the U.S. housing market will continue to be a drag on growth knocked the dollar lower in spite of data showing U.S. service sector activity picking up to a 13-month high.

The dollar dipped slightly to 121.31 yen from 121.40 yen in late New York trade, struggling to overcome a heavy array of sell orders near 122 yen after reaching a four-month high of 122.14 last week, near a 4-1/2-year peak of 122.20 yen.

The single European currency was little changed at 164.10 yen after hitting a record high near 164.60 yen on Tuesday.

AUSSIE SURGES, YEN SINKS The Australian dollar jumped 0.7 percent to a 17-year high of $0.8433 after data showed the country's economy expanded at a 1.6 percent clip in the January-March quarter from the previous quarter, easily surpassing forecasts.

Earlier the Reserve Bank of Australia kept rates on hold at 6.25 percent as expected, but the country's strong economy is seen keeping alive the possibility of higher rates if inflation reaccelerates.

The Australian dollar punched to its highest versus the yen since April 1992 near 102.25 yen, while the New Zealand dollar pushed back towards a 17-year peak struck the previous session.

Tomoko Fujii, senior economist and strategist at Bank of America, said the Aussie will continue to strengthen on the country's firm growth and as long as steady global markets encourage carry trades.

''Interest rate differentials, the Australian economy's strength and brisk international commodity markets make the Aussie attractive,'' Fujii said.

The yen has suffered despite two-year yields in Japan hitting 1.000 percent for the first time in 10 years on expectations of a Bank of Japan rate rise as soon as August, mainly because overseas yields have climbed more quickly.

U.S. two-year yields are about 4 percentage points higher than in Japan. Two-year yields in the euro zone are some 3.45 percentage points higher, the widest spread in nearly five years.

REUTERS HK KP1001