* Euro gives ground, talk hedge funds selling into rallies
* Aussie on the defensive, stops above $0.8365
* Aussie trims losses after fall on Rio Tinto comments
* Euro/Aussie pair higher as carry trades unwound
By Kaori Kaneko
TOKYO, May 24 (Reuters) - The euro fell on Monday as
investors sold into its latest bounce, while the Australian
dollar dropped as unwinding of carry trades funded in the single
currency continued on concerns markets would remain volatile.
After last week's flare-up, when the euro hit a four-year
low, investors were still cutting risk in their portfolios as
they waited for markets to calm down and the Australian dollar
shed 0.5 percent against the dollar and the low-yielding yen.
The Aussie's losses also deepened after miner Rio Tinto
<RIO.AX><RIO.L> said a mining tax had damaged Australia's
investment reputation, but it came back off the lows as stocks in
China, with which Australia has close trade ties, rose 3 percent.
Even though the Aussie is seen as having scope to rebound
possibly above $0.8400 <AUD=D4>, it remains vulnerable, with
Aussie/dollar one-month risk reversals <AUD1MRR=ICAP> showing an
extreme bias for puts in the options market.
The euro too remains vulnerable, as its short-covering bounce
runs out of steam, and one trader said there was talk that hedge
funds were still selling into its rallies against the dollar.
"The currency market focus is still the euro zone's fiscal
trouble, but wariness about its impact on the global economy
seems to be spreading, making investors increasingly risk
averse," said Jun Kato, senior manager for investment at Shinkin
Asset Management.
The euro <EUR=> fell to $1.2508 in Asian trade, down 0.5
percent from late New York business on Friday.
Last week it hit a four-year low of $1.2143 and then snapped
back to post its first weekly gain against the dollar in six
weeks. But worries about the health of Europe's banking sector
were expected to check further gains, with resistance pencilled
in at Friday's high of about $1.2670.
At the weekend, the Bank of Spain said it was taking over the
running of Spanish savings bank CajaSur after its planned merger
with another lender failed. []
That weighed on the euro, already hurt by worries about the
impact of deep public spending cuts in Greece, Spain and
Portugal.
It slipped to 112.86 yen <EURJPY=R>, down 0.2 percent from
New York on Friday when it jumped more than 1.0 percent.
Although there is no sign of improvement in its bearish
trend, euro/yen is likely to consolidate this week after a sharp
fall pushed the pair below its weekly bollinger band, FX analysts
at Bank of Tokyo-Mitsubishi UFJ said in a research note.
But even if the pair rebounds, its gains may be capped around
Y114.50 in the near term, they said. So far this month, euro/yen
has lost nearly 10 percent.
EURO VS AUSSIE
Speculators trimmed some of the record high short positions
against the euro in the week ended May 18. []. Still,
traders said the euro was likely to struggle in the short term.
"The euro is still vulnerable structurally as the short
covering that we saw last week seems to have run its course,"
said Tony Morriss, senior currency strategist at ANZ Bank. "Also
the unwinding of carry trades that lifted the euro against the
Aussie last week could run into some resistance."
The euro rebounded sharply against the high-yielding Aussie
<EURAUD=R> last week, hitting a three-month high around A$1.5456
on the back of a huge sell-off by hedge funds. On Monday, the
pair was trading at A$1.5083, not far from that peak.
Charts indicate the euro/Aussie put in a weekly key reversal
last week and if it closes above A$1.4777 this month, it will put
the pair in line for a monthly key reversal. That would not bode
well for the Australian dollar.
The Aussie <AUD=D4> fell 0.3 percent to $0.8297, with traders
reporting sizable buy stops above $0.8365. Those stops are
expected to be taken out this week, which could push the Aussie
to $0.8425 before it turns down once again.
Positioning in the options market also points to more pain
for the currency. Markets now favour Aussie/dollar puts by over 5
percent, partly reflecting a growing need among investors to
hedge against further declines.
The dollar index <.DXY> rose 0.4 percent to 85.69, helped
mainly by the greenback's rise against the euro and the yen. The
dollar inched up 0.1 percent to 90.17 yen <JPY=>.
(Additional reporting by Anirban Nag in Sydney and Rika Otsuka;
Editing by Michael Watson and Chris Gallagher)
