* Short-covering lifts dollar index from 10-mth lows
* Euro, Aussie fall against U.S. dollar
* Uncertainty whether QE2 has been fully priced in
(Updates prices; adds quote and graphics)
By Anirban Nag
LONDON, Oct 18 (Reuters) - The U.S. dollar bounced from a 10-month low against a basket of currencies on Monday, as investors uncertain how much monetary easing the Federal Reserve will resort to trimmed bearish bets against the greenback.
The dollar extended a rebound that started late last week, with the euro retreating from an 8-1/2 month high and the Australian dollar AUD=D4 backing off from Friday's peak above parity, the currency's highest since it was floated in 1983.
Traders said short-term speculative, model accounts and Asian central banks were active in the session as the euro fell to as low as $1.3830. Next downside targets are channel support at $1.3825 and then the Oct. 12 low of $1.3775.
The dollar index =USD .DXY, which rose 0.5 percent to 77.41, was seen as needing a move above its Oct. 12 high of 77.93 to signal a short-term bottom may be in place after Friday's 10-month trough of 76.144.
The index has lost nearly 5 percent in the past month as investors increased their bets against the dollar on heightened market expectations for the Federal Reserve to unveil a second round of quantitative easing as early as November.
"The dollar's move down has been extremely aggressive and there are investors wondering whether or not too much quantitative easing has been priced in," said Jane Foley, senior currency strategist at Rabobank.
"The dollar has been sold off in recent weeks but there are plenty of opportunities to book profits. So I expect to see some choppiness ahead of the next Fed meeting in November."
Market players were also trimming their bets against the dollar ahead of a forthcoming G20 meeting and before hedge funds' book closings at the end of November, analysts said.
The euro shed 0.6 percent on the day to $1.3886 EUR=, pulling away from a more-than eight month high of $1.4161, hit on trading platform EBS on Friday.
Data from the U.S. Commodity Futures Trading Commission showed speculators trimmed bets against the dollar in the latest week but still had hefty wagers against it. [IMM/FX]
"Graphics on Net U.S. dollar long positions
QE PRICED IN?
Federal Reserve Chairman Ben Bernanke on Friday offered his most explicit signal yet that the U.S. central bank was set to ease monetary policy further. [ID:nN15187998].
Two more Fed officials joined in, arguing for further aggressive action as U.S. inflation unexpectedly slowed in September even as retail sales picked up. [ID:nN16208445]. Still, with unemployment proving sticky, the Fed is expected to offer more support to the economy.
"More and more Fed officials are signing up for QE and if anything, this short squeeze in the dollar looks to be temporary," said Neil Mellor, currency strategist at Bank of New York Mellon. "The Fed is trying to bring about price stability and generate some inflation in the economy by flooding the market with more dollars. So, the dollar is headed lower."
The dollar's moves have recently been highly correlated with 10-year Treasury yields US10YT=RR. A senior trader for a major Japanese bank in Tokyo said the dollar could draw support in the near-term if longer-term U.S. Treasury yields continue to rise after climbing late last week.
Yet, the dollar ceded ground against the yen, falling 0.37 percent to 81.13 yen JPY= and edging back towards a 15-year low of 80.88 yen hit on EBS last week.
Foley at Rabobank said despite the dollar/yen move, "there is talk that the Japanese will not intervene ahead of the G20 meeting." The Group of 20 finance ministers' meeting starts in South Korea from Oct. 22.
The Australian dollar fell 0.6 percent to $0.9846 AUD=D4, continuing its pull back from parity. The Aussie rose to $1.0004 on Friday, but slid to $0.9801 on Monday after some macro funds sold, with traders citing decent stop-loss orders at $0.9780. (Editing by Catherine Evans)