* Dlr's bounce turns out to be brief
* Chinese and ECB comments cited as reason for sell-off
* Yen capped by speculation BOJ could ease next week
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By Anirban Nag
LONDON, Sept 28 (Reuters) - The struggling dollar slipped on Tuesday after a brief rally ran out of steam, while the euro recovered after a senior official said some European Central Bank emergency support may be withdrawn.
Traders ascribed the dollar's drop to comments from a former Chinese central bank adviser who said a devaluation of the U.S. currency may be inevitable.
Many traders expect the greenback's downtrend to continue, on a view that any future quantitative easing (QE) by the Federal Reserve, even in a modest form, would probably still be more aggressive than moves by other central banks.
The Wall Street Journal reported the Fed was considering buying a much smaller amount of bonds for a brief period and would decide whether to do more depending on how the economy fared. [ID:nTOE68R008].
"In the midst of all this talk, the currency war is just heating up and these comments from the Chinese could be a shot at the U.S.," said Chris Turner, head of FX strategy at ING.
Washington pressing China to allow the yuan to strengthen. The House of Representatives is expected to vote on a bill this week that would let the United States apply duties on goods from countries with undervalued currencies. [ID:nN24181175].
The dollar index <.DXY> <=USD> fell back towards a seven- month low of 79.19 hit on Monday, standing at 79.24, down 0.07 percent. It has lost 4 percent this month as investors sold the greenback on the back of a slow U.S. recovery.
"The dollar's trend remains lower and investors will be looking to sell at better levels," said Paul Mackel, director of currency strategy at HSBC. The dollar also eased against the yen, after having been helped earlier by a Nikkei business daily report that the Bank of Japan may further ease policy at its Oct. 4-5 meeting if it judges growth to be under threat.
That triggered talk the BOJ could undertake more QE next week by injecting longer-term funds into the money market or opt for the more controversial move of buying more Japanese government bonds. [ID:nSGE68Q0KS]
But the BOJ appeared divided about the need to ease further with sources saying some policymakers wanted the bank to save its policy ammunition in case the economy deteriorated.
CHANCE OF INTERVENTION HIGH
Apart from the uncertainty about more easing by the BOJ, the yen's gains were also checked by investor anxiety that Tokyo may intervene if the yen gets up towards 82 per dollar.
"There seems to be political pressure on the BOJ to ease policy further, but that is unlikely to alleviate much of the upward pressure that we are seeing on the yen from commercial flows," said Ian Stannard, senior currency strategist at BNP Paribas.
"So the downside risks for dollar/yen will remain and a further round of intervention will be required."
The dollar was marginally lower from its New York close at
84.14
Some traders expect more dollar selling by Japanese exporters before the end of Japan's fiscal first half on Sept. 30. There are said to be some stop-loss orders around 83.90 yen.
The euro was lifted by comments from ECB Executive Board member Juergen Stark, considered a hawk, that the ECB may not renew some of its support measures when they mature at year end. [ID:nLDE68R0W8].
That saw the euro recover lost ground made on speculation that Spain may be downgraded by Moody's. [ID:nLDE68Q0TH].
The euro was up 0.2 percent at $1.3478
Sterling