* Dollar index rises to two-month highs
* Sterling posts biggest one-day fall in four months
* Euro extends slide; kiwi also hit hard
By Ian Chua
SYDNEY, May 29 (Reuters) - The U.S. dollar hovered at a two-month high against a basket of major currencies early in Asia on Thursday, having benefited from a shake out of long positions in sterling and further weakness in the euro.
Traders said month-end buying had also supported the greenback, helping drive the dollar index as far as 80.581. A break above 80.599, the April 4 peak, will take the index back to highs not seen since mid-February.
The euro plumbed a fresh three-month low of $1.3587, and started trade in Asia just above that trough. Sterling suffered its biggest fall in four months to $1.6697, a dramatic reversal from its rally to a near five-year high just shy of $1.7000 earlier this month.
Even hawkish-sounding remarks from Bank of England (BOE) policymaker, Martin Weale, failed to stem the slide in the pound. Weale was quoted as saying the BOE should raise interest rates sooner rather than later, but now is not the time to start.
Traders were mostly at a loss for an explanation to the overnight action apart from pointing to month-end dollar demand.
Rather than trying to pin the moves on fundamentals, BNP Paribas analysts said the overnight action could be explained by "a more idiosyncratic exit from extended FX positions."
They said market participants were perhaps wary of a rise in volatility that would undercut carry trades in the lead up to the June 5 European Central Bank rate review and that investors were ever watchful for a reversal higher in U.S. yields.
Expectations of some policy action from the ECB have been mounting, a key reason for the recent underperformance in the euro. A Reuters poll of 48 economists showed a clear majority expect the ECB to cut its deposit rate into negative territory next week.
The dollar, however, eased against the yen as benchmark Treasury yields dropped to their lowest in nearly 11 months, a move that usually undermines the appeal of the greenback.
It last traded at 101.78 compared with a high of 102.15 set on Tuesday.
Another standout currency was the New Zealand dollar, which posted its biggest one-day fall in three weeks on Wednesday.
It slid nearly 1 percent to its lowest in over two months at $0.8470 after a private survey showed a drop in New Zealand business sentiment. The kiwi was last at $0.8493.
Its Australian counterpart also fell in sympathy but by a much smaller margin. The Aussie reached a low of $0.9214 before recovering to $0.9233, still well within its prevailing $0.9208/9278 range.
The Aussie's immediate fortunes hinge on capital expenditure data due at 0130 GMT.
"The data is important for shaping local GDP forecasts for the first quarter prior to its release next Wednesday, but intended capex spending next year will also provide a gauge for the outlook," said Janu Chan, an economist at St George Bank in Sydney. (Editing by Shri Navaratnam)
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