Euro steady vs USD, but cautious as risk events loom

Euro notes are seen at the Belgian Central Bank in Brussels October 26, 2011.

SYDNEY (Reuters) - The euro clung to modest gains on the greenback in Asia on Wednesday but floundered near a record low versus the Australian dollar in cautious trade a day ahead of the European Central Bank policy meeting and debt sales from Spain.

The euro stood at $1.2772, little changed from late New York levels, having bounced off a 16-month trough at $1.2666 set on Monday. Immediate resistance is seen at the overnight high around $1.2820, a level representing the 38.2 percent retracement of the January 3 to 9 decline.

Against the yen, the common currency was at 98.13, off an 11-year low of 97.28 set on Monday. Near-term support is seen around 94.80/95.00, while a complete unwinding of the 2000-2008 rise would take the euro back to the October 2000 trough around 88.87.

Investors trimmed bearish bets against the single currency for a second day on Tuesday thanks in part to a well-received Greek debt auction and news that ratings agency Fitch is unlikely to downgrade France.

These events followed a bullish outlook from U.S. aluminum maker Alcoa and a surge in China's copper imports, which bolstered risk appetite.

Traders, however, continued to express their negative view on the euro by selling it against commodity currencies. This saw the single currency hit yet another all-time low versus the Australian and New Zealand dollars on Tuesday at A$1.2353 and NZ$1.6047.

Against the Canadian dollar, it carved out a new one-year trough at C$1.2965.

"Commodity currencies and high beta currencies continue to outperform, due to a rising realization that the ECB is facilitating greater and sustained liquidity in the market," analysts at Societe Generale wrote in a client note.

"This comes on the back of a similar theme from the Fed, such that markets are indifferent between EUR and USD funding at this point, leaving the currency pair in a range."

While the euro is susceptible to bouts of short covering, some analysts do not expect any significant bounce similar to the one seen last year when the euro surged from $1.28660 in January to $1.49404 in May.

The firmer tone in the euro saw the dollar index .DXY take a further step down from a 16-month high set on Monday. But on the yen, the greenback was relatively steady at 76.81.

It stayed on the backfoot against commodity currencies as well, with the Australian dollar holding above $1.0300. The Aussie rose as high as A$1.0352 on Tuesday, a 2 percent rally from Monday's low of $1.0145.

"Part of the reason why the Aussie has put on two cents in the last few days is the view that China is going to further loosen policy, which eventually is going to be good for Australian commodity products," said Joseph Capurso, strategist at Commonwealth Bank in Sydney.

"But I think that's overdone and won't be surprised to see the Aussie ease back for the reminder of the week."

Traders generally expected the market to be cautious as the ECB policy meeting and debt sales from Spain loomed. Italy will also tap the bond market on Friday.

The ECB is expected to hold rates at a record low of 1.0 percent and press governments to step up their efforts to tackle the euro zone debt crisis. Traders said there is a chance it may cut rates again.

"There is a good chance they will go this month or sometime over the next couple of months. Europe is in recession and they haven't fixed their debt crisis," Capurso added.

Spain and Italy will also return to the debt market to raise funds and traders are keen to see if investors will lend to these countries at lower interest rates.

(Additional reporting by Reuters FX analyst Krishna Kumar)