FOREX-Euro slips as rally loses steam, BoE in focus

* Euro lacks driver after ECB rate hike prospects dampened

* Fall in U.S. yields has limited impact on dollar

* Aussie drops after Australian jobs data

* Sterling in focus ahead of BoE policy meeting

* Implied vols on euro/dollar, dollar/yen under pressure

By Hideyuki Sano

TOKYO, Feb 10 (Reuters) - The euro slipped against the dollar on Thursday, pressured by fading prospects for a European Central Bank rate hike while a boost the previous day from falling U.S. bond yields proved short-lived, fuelling expectations that it will stick to its well-worn range.

Traders instead focused on the British pound, which was well-supported ahead of the Bank of England's policy announcement at 1200 GMT, as speculation lingered of a surprise rate hike.

The euro, in contrast, lacked momentum after the European Central Bank chief last week quelled expectations of a near-term rate hike, which toppled the currency from a 12-week high.

"It's difficult for now for the euro to rise above the peak it hit earlier this month. It will need a fresh factor to push it beyond that high," said Keiji Matsumoto, a strategist at Nikko Cordial Securities.

The euro slipped to $1.3694 , down about 0.3 percent from late U.S. levels.

Although the fall in U.S. yields helped the currency rise sharply on Wednesday, it has failed to make a sustainable break above resistance around $1.3740, a 61.8 percent Fibonacci retracement of its fall from November to January.

"I expect the euro to stay in a boxed range between $1.35 and $1.38 for the time being," said Nikko's Matsumoto, reflecting the view of many market players.

Many traders are also wary about bidding the dollar up too far after Federal Reserve Chairman Ben Bernanke gave no indication that the central bank would cut short its bond buying programme, let alone raise interest rates down the road.

That, combined with strong foreign demand at a 10-year U.S. bond auction, helped to drive U.S. yields from a nine-month high and undermined the greenback on Wednesday.

Bernanke, testifying in Congress, acknowledged renewed momentum in the economy, saying a drop in the jobless rate to 9 percent was grounds for optimism while adding that hiring was still anaemic.

TREASURY YIELDS

U.S. Treasury yields fell from nine-month highs, with an auction of 10-year bonds drawing strong foreign demand, helping to widen the euro's yield advantage over the dollar.

The two-year German-U.S. yield spread, which has had a high correlation with the euro-dollar rate, rose to 0.64 point from a three-week low of 0.55 hit on Tuesday.

German bond yields and euro zone short-term interest rates also climbed despite reports that hawkish ECB policy maker Axel Weber, the head of the Bundesbank, had pulled out of the race for the presidency of the ECB. [ID:nLDE7180MQ]

"It is true that Weber is one of the most hawkish policymakers. But the market seems to be leaning to the view that the ECB's policy direction will not be that different even if Weber doesn't take the helm," said Masafumi Yamamoto, chief FX strategist at Barclays Capital in Tokyo.

The dollar rose 0.3 percent against the yen, with buying by Japanese corporates helping to lift it to a nearly two-week high of 82.72 yen .

Many traders said that heavy offers from Japanese exporters as well as repatriation flows from Japanese companies will likely keep the pair below 83 yen in the near future.

With both euro/dollar and dollar/yen seen in a holding pattern, some speculators are now selling options in the two pairs -- essentially betting against sharp moves -- rather than making directional bets.

That pushed one-month implied volatility on euro/dollar to a five-month low , while one-month dollar/yen volatility was flirting with three-year lows .

The British pound held on to Wednesday's 0.2 percent gain to trade at $1.6100 , ahead of the Bank of England's policy-setting meeting later in the day.

While many currency traders expect the bank to stand pat this time, money markets are pricing in about a 20 percent chance of a rate hike on Thursday and a 100 percent chance by May. [ID:nLDE7181WS]

Sterling could fall if the Bank of England does not take action, although expectations of an early hike are likely to support the pound, some traders said.

"Among major central banks, the Bank of England is likely to be the first to raise rates," said Sumino Kamei, senior analyst at the Bank of Tokyo-Mitsubishi-UFJ.

The dollar's index against a basket of currencies stood at 77.789 <.DXY> <=USD>, up 0.2 percent on the day.

The Australian dollar fell after jobs data showed that more jobs than expected were created despite the floods in Queensland, although full-time employment fell, which some traders said prompted profit-taking. The Aussie slipped to $1.0070, down 0.5 percent on the day. (Additional reporting by Masayuki Kitano; Editing by Edmund Klamann)