* DXY breaches resistance, sets sights on 78.90
* Dollar takes breather after surging on China rate rise
* Euro has major support at $1.3580
* Shanghai shares rise, cross/yen pairs stabilise
By Masayuki Kitano
TOKYO, Oct 20 (Reuters) - The dollar dipped against a basket of currencies on Wednesday, trimming gains it made after a surprise rate hike by China spurred the market to lower risk exposure, but was seen likely to stay supported due to the potential for further short-covering.
The dollar index dipped 0.2 percent to 78.041 after climbing more than 1.6 percent the previous day.
But its breach of resistance near 77.93, its Oct. 12 high, and through 77.894, a 23.6 percent retracement of its August-October slide, could pave the way for a move to the 78.96-98 area, which would be a 38.2 percent retracement of that August-October drop.
Investors had increased their bets against the dollar in recent weeks on heightened market expectations for the Federal Reserve to unveil a second round of quantitative easing as early as November.
That positioning had pointed to the risk of a short-covering bounce in the dollar.
"I get the sense that the dollar could rise further in the near term," said Hideki Amikura, deputy general manager for Nomura Trust and Banking's foreign exchange section.
"Market moves fuelled by excessive liquidity stemming from the United States may be drawing to a close," Amikura said.
One supportive factor for the dollar is that some Fed officials seem to be trying to prevent market players from too aggressively factoring in prospects of additional U.S. quantitative easing and its potential impact, Amikura said.
The commodity-sensitive Australian dollar rose 0.4 percent to $0.9744, regaining a bit of ground after sliding more than 2 percent on Tuesday.
Investors had trimmed some of their risk-taking positions on Tuesday after China raised interest rates by 25 basis points in its first tightening in nearly three years.
The move spurred concerns that it may mark the start of a more aggressive phase of monetary tightening, dampening Chinese and global growth and denting its voracious demand for commodities.
Traders had fretted that the yen could strengthen broadly if Chinese and Asian shares were to fall sharply, but as it turned out Chinese shares edged up 0.7 percent after having fallen initially.
The Australian dollar edged up 0.2 percent against the yen to 79.28 yen, with one trader citing Aussie/yen buying by Japanese investors.
Some analysts said the market's reaction the previous day was overblown, and with the Federal Reserve set to ease monetary policy further as early as next month any dollar rebound would be short-lived.
"What I think will be short-lived is the weakness in Asian and commodity currencies in particular," said Greg Gibbs, a strategist at RBS in Sydney.
"I don't think the hike in China is too significant in terms of actually slowing down growth there. I wouldn't view that as a factor to be getting bearish on risk or bearish on Asian growth."
The euro rose 0.3 percent to $1.3772, regaining some ground after its 1.6 percent slide the previous day.
The Euro has major support at $1.3580, a 38.2 percent retracement of a rise from $1.2645 on Sept.10 to last Friday's peak of $1.4161.
The dollar dipped 0.3 percent to 81.37 yen.
A string of Federal Reserve officials indicated on Tuesday that the central bank will soon offer further monetary stimulus to the economy, with one saying $100 billion a month in bond buying may be appropriate.
Federal Reserve Governor Elizabeth Duke, however, told the Money Marketeers of New York University that more easing at the Fed's November meeting is not a done deal. (Additional reporting by Hideyuki Sano, Reuters FX analyst Krishna Kumar in Sydney; Editing by Michael Watson)