* Euro up 0.5 percent vs dollar at $1.4895
* ECB Trichet needs to flag June hike to boost euro further
* Further upside likely to be slowed by large option barrier
(Changes dateline, adds quote, detail, previous TOKYO)
By Neal Armstrong
LONDON, May 5 (Reuters) - The euro held near a 17-month high against the dollar on Thursday as markets waited for the European Central Bank to reinforce higher rate expectations, with a hint of a June hike needed to boost the currency further.
Markets players said that if ECB President Jean-Claude Trichet signalled April's rise would be followed by another as early as June with the phrase "strong vigilance" on price pressures, the euro could rise, but some analysts thought further upside potential from Trichet's words was limited.
"Today it will be difficult to surprise on the upside for the ECB and the euro as inflation expectations have remained stable over recent weeks and growth momentum has slowed," said Manuel Oliveri, currency strategist at UBS in Zurich.
"Officially we expect the next ECB hike in July," he added.
A large option structure with a barrier at $1.4950 was expected to restrict further euro gains. Traders said the structure would attract euro offers from the option holder to keep the barrier in place and gain a pay-out at expiry on Friday.
"With the forward curve already largely priced for the cumulative rate increases we expect for the remainder of the year (75 bps) and the market positioned for a very hawkish ECB, it would take a bringing forward of rate hike expectations to boost EUR meaningfully from current levels," RBC analysts said in a note.
The euro traded up around 0.5 percent on the day against the dollar at $1.4895. It rose to a 17-month high of $1.4940 on Wednesday as the dollar came under broad selling pressure.
Traders reported demand at $1.4830 and on approach to $1.4800, followed by option-related bids placed ahead of $1.4750.
Data showing weaker U.S. private hiring than expected in April and a sharper slowing of service sector growth reinforced diverging U.S. and euro zone rate outlooks. The Federal Reserve is expected to keep policy loose for many months after its bond-buying programme ends in June.
On Wednesday, top Federal Reserve officials repeated their cautious view on the policy outlook, saying inflation remained well under control.
Market participants are also watching commodities to see if a further slide prompts short-covering in the dollar and an unwind of dollar-funded carry trades. Copper hit a seven-week low and silver extended losses, tumbling nearly 20 percent this week.
Some of the liquidation of leveraged positions was due to profit taking before this week's big events, including the ECB decision and the U.S. payrolls report on Friday, traders said.
DOLLAR MIRED
The dollar index hit its sixth three-year low in the last seven sessions, but managed to rebound from the trough. The index last traded at 72.914, down slightly from late U.S. trade after having dipped as low as 72.696.
The Australian dollar fell after data showing retail sales fell in March and were flat in the first quarter, indicating higher interest rates were keeping consumers cautious.
But the data did little to shake views that the Australian central bank would resume lifting rates in coming months as core inflation shows signs of heating up. Earlier this week, the Reserve Bank said underlying inflation was likely to head higher, laying the ground for further tightening.
The Aussie was down 0.2 percent at $1.0716 after dropping to a session low of $1.0694.
The dollar was down 0.4 percent at 80.24 yen, mired near its lowest levels since March 18 -- the day of the coordinated G7 intervention to weaken the Japanese currency following its surge to a record peak against the greenback.
(Additional reporting by Ian Chua and Eric Burroughs)