* Euro jumps on expected rate hikes
* Yen down vs dollar, EUR/JPY hits 10-month high
* Market focus on rate differentials
* Asset managers go tentatively long carry trades (Recasts, updates prices, adds detail, comment, byline)
By Steven C. Johnson
NEW YORK, March 30 (Reuters) - The euro hit a 10-week high against the yen and rose against the dollar on Wednesday as markets braced for higher euro zone interest rates, while the Australian dollar hit levels last seen in the early 1980s.
The euro erased losses against the U.S. currency after a European Central Bank policymaker said the ECB intends to raise rates gradually, which traders said suggests next week's expected hike may be the first of several. [ID:nLDE72T1ZS]
The prospect of higher euro zone borrowing costs bolstered hopes the world economy was improving and encouraged investors to take on more risk, a trend that looks set to carry the euro higher in coming weeks and continue to hurt the yen.
The euro in particular has shown exceptional staying power. It is up 5 percent against the dollar in 2011 despite lingering fiscal problems in several euro zone states, prompting some traders to refer to it as the "Teflon euro."
Wednesday's remarks from the ECB's Lorenzo Bini Smaghi should help the currency extend those gains, as they "hint that a series of rate hikes may be coming this year," said Brian Dolan, chief strategist at Forex.com.
The euro's move above its 200-hour moving average around $1.4125 suggests a renewed uptrend, and a break of $1.4250 would make a rally to $1.44-45 likely, Dolan said.
The euro was last up 0.1 percent at $1.4129
"I would be confident in the euro at these levels," said Pierre Lequeux, head of currency management at Aviva Investors. "I like the euro, basically, and I see some upside."
The dollar rose to around 83.19 yen
Traders reported offers from 83.30-50, with orders said to be thin until more supply placed at around 84.00.
REVIVING THE CARRY TRADE
The dollar hit a record near 76 yen this month when an earthquake in Japan fed speculation the diaster would force Japanese investors to bring money home from abroad.
Japanese intervention stopped runaway yen gains and rising U.S. Treasury yields have since carried the dollar higher. Remarks from some Federal Reserve officials about the need to tighten U.S. monetary policy may have contributed to the rise.
Yield differentials are key to the revival of the "carry trade," in which investors borrow in low-yielding, low-risk currencies such as the yen to fund more lucrative trades.
"You can see the euro/yen relationship indicating that yen carry trade is being put back into play," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ http://link.reuters.com/gen78r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
AUSSIE SHINES
Investors also snapped up the high-yielding Australian dollar, which rose to $1.0338
Scotia Capital strategist Camilla Sutton said repatriation flows into Japan may yet materialize, which could help push the yen higher, at least against the dollar.
Faros Trading analyst Dan Dorrow said the Aussie dollar's recent highs, though, are not a signal to short it, as expectations of tighter U.S. monetary policy are overdone.
Meanwhile, he said the market is underestimating the chance the Reserve Bank of Australia lifts rates from 4.75 percent.
"While domestic weaknesses may keep the RBA on hold for awhile, risks are for an upside surprise," he said. "The potential boost to the Aussie will be augmented by global GDP strength, firm or rising commodity prices and also central bank reserve diversification. I am long Australian/U.S. dollar." (Additional reporting by Nick Olivari and Chuck Mikolajczak in New York; Editing by Dan Grebler)