* US dollar index rises from 10-month lows
* Extended positioning limits dollar's downside
* Uncertainty whether QE2 has been fully priced in (Updates prices, adds quote, details)
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 uncertainty over the size of further monetary policy easing by the Federal Reserve.
The dollar climbed as high as around 1.3830 per euro overnight as a wave of profit-taking that began on Friday continued into Monday. But the euro has since recovered after a breach of the $1.3850 level wasn't sustained.
Despite an overall bearish sentiment on the dollar, analysts said the downside looked limited as short dollar positions were extended and the euro faced strong resistance at $1.40.
Investors are more certain there will be further easing after Fed Chairman Ben Bernanke on Friday offered his most explicit signal yet the U.S. central bank was set to relax monetary policy further. The question now is the amount. For details, see
"After the news 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.
In late trading, the euro was 0.1 percent higher at $1.3994, but down from a more than eight-month high of $1.4161, hit on trading platform EBS on Friday. 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. On the upside, traders said gains in the euro may be limited unless the currency can consistently close above the pivotal $1.40 mark.
Adding to strength in the euro was a narrowing of spreads between 10-year U.S. and German yields in favor of the single currency, analysts said.
QE PRICED IN?
The dollar index was down 0.1 percent at 76.947, 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 more than 5 percent in the past month as investors increased their bets against the dollar on heightened expectations for the Fed to unveil a second round of quantitative easing.
Atlanta Federal Reserve bank president Dennis Lockhart said on Monday the U.S. economy is weak enough to warrant further monetary easing by the Fed, though such a policy carries risks and should not be taken lightly.
This added to 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.
With much of the impact of additional easing already priced in, analysts cautioned of the risk of a dollar rebound if the Fed announces asset purchases of less than $1 trillion or takes a more gradual approach after its November meeting.
"People priced in a little bit too quickly how much the Fed was going to do and now people are a little bit nervous about the magnitude," said Mark McCormick, currency strategist at Brown Brothers Harriman in New York.
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.
The dollar ceded ground against the yen, falling 0.3 percent to 81.18 yen and edging back toward a 15-year low of 80.88 hit on EBS last week. Traders reported sovereign demand around the 81.15 level.
The Australian dollar recovered from losses to last trade up 0.3 percent at $0.9932. The Aussie rose to $1.0004 on Friday, the highest since floatation in 1983. (Additional reporting by Nick Olivari; Editing by Andrew Hay)