* Euro down 0.2 pct at $1.2667 <EUR=>
* Euro resistance layered above $1.27
* Canada dollar <CAD=D4> surges on strong jobs data
* High-yielders hold gains on improving risk appetite
(Adds prices, Canadian dollar moves)
By Lin Noueihed
LONDON, July 9 (Reuters) - The euro slipped off two-month
highs against the dollar on Friday with investors taking profits
ahead of the weekend as strategists said its recent rally would
peter out due to lingering worries about the euro zone economy.
The biggest mover in European trade was the Canadian dollar
<CAD=D4>, which surged 1 percent against the greenback on a
stronger-than-expected improvement in jobless figures.
The single currency was supported in U.S. trade on Thursday
by strong German factory data [], a positive U.S.
jobs report and more clarity on European bank stress tests, all
of which boosted demand for riskier assets such as shares.
"The euro rebound is now running out of steam. It is facing
tough resistance at the $1.27 level," Ian Stannard, foreign
exchange strategist at BNP Paribas, said.
"We expect it to come back under pressure. Continued concern
regarding the stress tests will weigh in the medium term...
Overall the picture for euro is negative."
The euro erased gains to trade down 0.2 percent at $1.2667
<EUR=> at 1121 GMT, after reaching a 2 1/2-month high of $1.2723
on trading platform EBS.
Options with a strike price of $1.2650 set to expire later
on Friday were seen supporting the euro, traders said, after it
fell to the day's low of $1.2660.
BNP's Stannard said more demand for high-yielding commodity
currencies such as the Australian dollar would also hit the
euro, which has come to be seen as a funding currency.
Despite its recent rally, the euro zone's debt problems have
discouraged investors from taking long positions in the euro.
Some Asian central banks were seen willing to re-establish
long euro/dollar positions above $1.2750 because a clear breach
of $1.2730 would suggest the downtrend had been broken.
The euro could reach $1.2767 as the target off an A-B-C wave
sequence starting from the euro's four-year low at $1.1876, with
the C-wave starting at $1.2152. The $1.2780 area is a 50 percent
retracement of its fall from mid-April to the June low.
"There is still a risk that euro shorts get covered and the
bounce extends but it is no more than that: a short-term
bounce," Adam Cole, global head of foreign exchange strategy at
RBC Capital Markets, said.
That view was reflected in the gap between 1-month risk
reversals <EUR1MRR=ICAP>, which have fallen nearly 55 basis
points to 0.85/1.35 percent since end-June, and 1-year risk
reversals <EUR1YRR=ICAP>, which have shed 25 basis points.
This indicates market players are willing to pay a higher
premium to buy the right to sell the euro down the line.
CANADIAN DOLLAR UP ON JOBS
Canada added 93,200 jobs in June, building on previous gains
and coming close to recovering all the jobs lost during its
recession. [] The U.S. dollar fell 1 percent to
C$1.0326 <CAD=D4> on the data, its lowest since late June.
The dollar index <.DXY> fell 0.1 percent to 83.744 following
the Canadian numbers, but off from a two-month low. Canada's
figures mirror strong jobs data from Australia earlier this week
that drove the Australian dollar up more than 4 percent.
Strong data has boosted hopes of a firmer economic recovery
and raised pressure on the low-yielding yen <JPY=> as investors
cut long positions and shifted into high-beta currencies like
the Aussie <AUD=D4> and New Zealand dollars <NZD=D4>.
The euro touched a two-week high of 112.69 yen <EURJPY=R> on
EBS after jumping more than 1 percent on Thursday but pared
those gains and was flat at 112.23 euro.
The dollar gained 0.2 percent to 88.56 yen <JPY=>. It has
moved away from a seven-month low of 86.96 yen struck on July 1.
(Additional reporting by Tamawa Desai and Naomi Tajitsu)
