* Reduced easing expectations keep euro on steady footing
* Euro's gains capped slightly after lukewarm China data
* Kiwi rallies on rate hike, jobs data boosts Aussie
(Adds new quotes, changes dateline previous TOKYO)
By Patrick Graham
LONDON, March 13 (Reuters) - The prospect of further inflows of capital and a lack of any easing in European monetary policy helped the euro back to 2-1/2 year highs and the verge of a break above $1.40 on Thursday.
The New Zealand and Australian dollars both also surged, the kiwi boosted by a rise in central bank rates and signs of more to come, while stronger-than-expected employment numbers helped the Aussie.
With views differing on the barriers between $1.3950 and $1.40, dealers said that a break past psychological resistance near the round number could see it head swiftly higher.
The single currency has surprised many with its strength this year but the European Central Bank's (ECB) determination to sit out what it sees as temporary falls in prices in some euro zone member states has opened the door to more gains.
"The policy messages and data support the euro and we think that will allow it to continue to push higher from here," Ian Stannard, a strategist at Morgan Stanley in London, said.
One factor in the euro's rise this year has been a general inflow of capital to the euro zone, reflecting a return of interest among investors in the debt issued by the currency bloc's weaker members.
The biggest European banks have also been pulling more capital back to base ahead of an opening review of their books by the ECB as it takes over regulation of the sector's major players.
Italy sells up to 7.75 billion euros in debt on Thursday while Ireland, steadily returning to the market after completing a programme of cutbacks required by its international bailout lenders, sells 1 billion euros worth of 10-year bonds.
"The foreign participation at those auctions will be interesting for what it says about capital inflows to the euro zone," Stannard said.
"The flow picture looks quite positive and the euro zone's current account surplus is not being recycled (back out into investment outside the euro zone) because of the weakness of European banks' balance sheets."
In early European trade, the euro traded just off the 2-1/2 year high of $1.3954, up about 0.3 percent on the day. The Swiss franc also extended gains against the dollar to 0.87095 francs - its strongest since late 2011.
ANTIPODES
Both the Aussie and the kiwi had suffered a day earlier from a dramatic fall in prices for copper and other commodities due to growing concerns over the Chinese economy, a major driver of demand for Australia's huge mining sector.
That move calmed overnight with Asian stock markets and copper prices both stabilising, helping a recovery in currencies closely linked to the prices of the raw materials of which China has been the major global buyer in recent years.
Still, the data from China overnight was lukewarm at best, with industrial output rising 8.6 percent in the first two months of 2014 from a year earlier, missing market expectations, and growth in retail sales was also weaker than expected.
"The numbers out of China were not impressive by all means, but it was not bad enough for players to create big fresh 'risk off' positions - thus currency reaction was limited," said a trader at a large Japanese bank in Tokyo.
"Caution is still needed, however, as markets opening later in the session may show a greater negative reaction to the China data," he said.
The Reserve Bank of New Zealand (RBNZ) delivered a widely expected interest rate hike and flagged that a further 100 basis points of tightening was possible this year.
That pushed the kiwi to $0.8567
"Today's communication strongly suggests the RBNZ will be on the front foot for the next few meetings," Michael Turner, strategist at RBC in Sydney, said.
(Additional reporting by Ian Chua in Sydney and Shinichi Saoshiro in Tokyo; Editing by Louise Ireland)
((patrick.graham@thomsonreuters.com)(+44 207 542 9429)(Reuters Messaging: patrick.graham.thomsonreuters.com@reuters.net))
Keywords: MARKETS FOREX/
