FOREX-Dollar struggles to extend rally, traders eye major euro bulwark

* Euro uncomfortably close to support around $1.2000
* Yellen downplays rate hike talk, but damage done
* Kiwi dollar bounces on upbeat NZ jobs data

(Updates prices)
By Wayne Cole
SYDNEY/SINGAPORE, May 5 (Reuters) - The dollar tried to
extend a rally on Wednesday as chatter about the possibility of
higher U.S. interest rates and a sell-off in tech stocks soured
risk sentiment to the benefit of the safe-haven currency.
The dollar's bounce on Tuesday put pressure on the euro,
which dropped to $1.2021 EUR=EBS and threatened to breach
important chart support in the $1.1995/1.2000 area.
"If sustained, this could suggest today's session may be
important for near-term direction, particularly if EURUSD
managed to close below the key $1.20 pivot," said Ned Rumpeltin,
European head of FX strategy at TD Securities.
"We think we will need to see a daily close below the $1.20
mark to give more credence to observations that the USD tends to
appreciate broadly during the month of May."
Against a basket of currencies, the dollar was barely
changed around 91.21 =USD but away from a recent two-month low
of 90.422. It needs to clear resistance at 91.425 to extend the
rebound.
Rumpeltin noted that over the last 10 years, the dollar had
averaged gains against each of its G10 counterparts in May.
The bounce was partly sparked by comments from U.S. Treasury
Secretary Janet Yellen that rate hikes may be needed to stop the
economy overheating. Yellen later downplayed their importance, but even the
slightest mention of U.S. tightening has an outsized impact in
markets that have become so dependent on monetary stimulus.
The effect was apparent in large-cap tech stocks, which
suffered hefty losses overnight, dragging the Nasdaq down 1.88%.
So far, Federal Reserve Chair Jerome Powell has argued the
labour market is still far short of where it needs to be to
start talking of tapering asset buying.
That position could be tested on Friday should the April
payrolls report be as strong as some are suggesting. The median
forecast is for a rise of 978,000, but estimates stretch as high
as 2.1 million.
Three more Fed officials are speaking later on Wednesday
providing the opportunity for further market-moving comments.
Westpac analysts pointed to expectations for a blockbuster
payrolls number as a factor helping the dollar build a base.
"The Fed's more influential dovish core will have the last
word, but that won't stop more hawkish regional Fed presidents
from producing the odd tapering headline," they said in a note,
adding the dollar's uptrend could go as far as 92 if payrolls
beat the lofty expectations.
Europe's reopening and pick up in the vaccination pace there
could limit the dollar's gains, they wrote.
Trading was limited in Asia with Japan and China on holiday,
but the New Zealand dollar blipped higher to $0.7170 NZD=D3
when local jobs data proved strong than expected. The dollar was steady on the yen at 109.31 JPY= and again
needs to break resistance at 109.61 to encourage more
speculative bids.
One drag for the dollar is the U.S. trade deficit, which
expanded to a record $74.4 billion in March. "This is a medium-term weight on US dollar because the U.S.
will become increasingly dependent on long term foreign
investments to finance the current account deficit," said Kim
Mundy, a senior economist & currency strategist at CBA.
"As a result, we believe the recent USD downtrend has
further to run."