* Euro tests $1.2200 after stops triggered, squeezing shorts
* Aussie pierces first layer of resistance at $0.8552
* Dollar index backs down further from recent high
By Charlotte Cooper
TOKYO, June 14 (Reuters) - The euro rose on Monday after a
burst of short-covering lifted the single currency above $1.22
and further away from a four-year low, but traders were wary
about chasing gains and expected its downtrend to continue.
The Australian dollar climbed to its highest in a month above
$0.8560, extending a rally from late last week on improved risk
tolerance and tackling the first layer in a band of resistance at
$0.8550-80 <AUD=D4> which is blocking its path to higher ground.
With Asian trade thinned by a holiday in Australia, traders
said the euro triggered stop-loss buy orders at $1.2160 <EUR=>,
laying the groundwork for a push above $1.22 as holders of short
euro positions bought it back, fuelling the jump.
The euro, locked in a downtrend on worries about euro zone
fiscal problems, recovered to its highest level since early June
against the U.S. dollar but was expected to meet resistance at
its 21-day moving average up at about $1.2230.
"I suspect there are euro short positions left in markets so
there will probably be a bit more short-covering," said Daisuke
Karakama, a market economist at Mizuho Corporate Bank.
"But its rebound will run out of gas. There will be an EU
summit this week, but European policymakers appear to have run
out of policy steps for now."
The market remains wary of euro zone sovereign debt problems
and the risks these pose to the banking sector.
The euro has lost 15 percent against the dollar this year but
managed to gain 1.6 percent in the course of last week as it
pulled up from a four-year low at $1.1876.
It was at $1.2175, up 0.5 percent from late U.S. trade on
Friday, after reaching as far as $1.2208.
After the $1.2230 level, it could face resistance at about
$1.2329, a bottom hit in October 2008.
European Union leaders meet on Thursday and are expected to
make a new attempt to convince markets they can contain debt
problems by agreeing on how to tighten economic policy
coordination and strengthen budget discipline. []
SCOPE IN A DOWNTREND
Nonetheless, investors are also wondering how the region's
growth will weather the belt-tightening, and data from the
Commodity Futures Trading Commission showed speculators boosted
their bets against the euro in the week ended June 8, although
net short positions were below record levels. []
With the market still very short euros, Sue Trinh, a senior
FX strategist at Royal Bank of Canada in Hong Kong, did not rule
out a push up as far as $1.24-$1.25 within its downtrend.
"If the moves continue then we could start running into
systematic-type stops for the likes of euro/dollar and the DXY
(dollar) more generally," she said.
CFTC data showed speculators also increased bets in favour of
the U.S. dollar last week, while they cut net long positions in
the Australian dollar almost by half.
The Aussie, which fell in April and May as the euro tumbled,
breached $0.8552 <AUD=D4>, its highest in a month, and now faces
resistance at about $0.8570-80, stemming from a low in February
and a 38.2 percent retracement of its April-May drop.
It rose 0.7 percent to $0.8564 after probing as far as
$0.8571. It peaked just below $0.94 in April but twice found
support at $0.8065-80 and has risen since, making chartists look
for signals that it can recover higher.
The Aussie also gained 0.6 percent on the low-yielding yen,
which was soft across the board, to 78.69 yen <AUDJPY=R>,
touching its highest in nearly four weeks.
The euro climbed 0.9 percent to 112.02 yen <EURJPY=R>, its
firmest level against the Japanese currency for more than a week.
The rise in yen crosses also pushed up the dollar 0.3 percent
to 91.95 yen <JPY=>, putting it above its 30-day moving average.
But the dollar index <.DXY>, a gauge of its performance
against six major currencies, fell 0.7 percent to 86.928,
retreating further from a 15-month high above 88.70 set last week
and slipping below its 14-day moving average at 87.251.
Sterling edged up against the dollar <GBP=D4> after dropping
sharply on Friday but continued to lose ground against the
reviving euro <EURGBP=D4>.
Britain's new fiscal policy watchdog is due to give estimates
later on Monday that are expected to pour cold water on the
previous government's hopes for a powerful recovery and offer
hints on the scale of spending cuts and tax hikes seen as
necessary to rein in the budget deficit. []
(Additional reporting by Hideyuki Sano, Satomi Noguchi in Tokyo
and FX analyst Krishna Kumar in Sydney; Editing by Hugh Lawson)
