* Fed's discount rate hike boosts U.S. rate outlook
* Bernanke testimony next week to set tone for FX market
* Euro debt concerns to keep euro vulnerable
* U.S. data next week seen dollar-supportive
By Gertrude Chavez-Dreyfuss
NEW YORK, Feb 19 (Reuters) - The dollar is likely to rally again in the upcoming week, bolstered by a growing view U.S. interest rates will rise imminently after the Federal Reserve raised the discount rate this week.
While the Fed has emphasized Thursday's announcement was not a signal that U.S. monetary policy has changed, analysts said the move nonetheless suggested that the U.S. economy's recovery is on a steady path and should support the dollar over the next few months.
Fed chairman Ben Bernanke's semi-annual testimony on monetary policy before Congressional panels next week will be the market's main focus. Investors are hoping Bernanke would shed light on the Fed's surprise but well-telegraphed increase in the Fed's discount rate.
"The market is now looking at the Fed as the second most hawkish central bank in the G20 space after Australia, especially after moving its monetary policy toward a more tightening policy," said Boris Schlossberg, director of FX research at GFT in New York.
"The Fed is saying it's normalization, but if you go from dovish to normal, that's tightening and overall good for the dollar."
The dollar rose to a fresh eight-month high against a basket of six major currencies <.DXY> on Friday at 81.342 and has risen 3.8 percent so far this year, after being down 4 percent in 2009.
The euro
Schlossberg thinks if euro/dollar breaks below $1.3400, then the pair could drop to $1.3300 in the near term, although he doesn't rule out a short-term bounce in the currency after the drubbing it has taken the last few weeks.
EURO ZONE WORRIES
Persistent worries about fiscal debt in the euro zone's peripheral countries led by Greece, Portugal and Spain are expected to continue to be a drag on the euro, capping any short-term covering rally.
"Intensifying sovereign risk concerns could have broader negative implications for the banking sector and threaten the fragile recovery in the Eurozone," said Sophia Drossos, currency strategist at Morgan Stanley in New York.
"Market participants are increasingly debating whether these factors could undermine the euro's global role."
A bright spot for the euro, however, was Friday's data showing a jump in the euro zone PMI manufacturing index to its pre-crisis level in February. The report fanned hopes for a strong gross domestic product growth in the Euro zone for the first quarter.
Danske Bank in a research note said the index's new orders component is currently signalling annualised GDP growth of about 2 percent in the first quarter for the euro zone.
In terms of U.S. economic data, analysts say, reports on the Chicago Fed manufacturing indexes, durable goods, jobless claims, and the second GDP estimate for the fourth quarter are expected to show further improvement in the world's largest economy. That should boost the dollar even more.
In other currencies, sterling is expected remain under pressure. The latest UK public sector data showed a 4.3 billion-pound deficit in January, the first shortfall in a month typically characterized by increased tax revenues.
A rate hike in Britain is not on the horizon in the near and medium term after the Bank of England said last week inflation would fall back below 2.0 percent by the end of the two-year period.
Ashraf Laidi, chief market strategist at CMC Markets, said he was not ruling out the possibility of fresh quantitative easing measures ahead of the UK elections, which should weigh on sterling. He added that any sterling recovery versus the dollar is capped at $1.5480 and $1.5570, before the market re-tests $1.5320.
(Editing by Chizu Nomiyama)