FOREX-Euro buoyed by short-covering, Italy bond sale eyed

* Euro holds firm despite Spanish ratings downgrade

* NZD retreats from highs, RBNZ softens rate-hike tone

* Italy bond sale in focus

By Ian Chua

SYDNEY, June 14 (Reuters) - The euro clung on to most of its overnight gains early in Asia on Thursday, while commodity currencies like the Australian dollar came under renewed pressure following a negative close on Wall Street.

The euro last stood at $1.2574, having risen as high as $1.2611 on Wednesday as investors trimmed very bearish positions on the single currency. But a three-notch downgrade of Spain's credit ratings by Moody's saw the short-covering come to an abrupt end.

"This is now the lowest rating among the three main agencies for Spain. This may augment the recent stress in the European bond markets today and likely put the Italian bond auctions today under greater scrutiny," analysts at BNP Paribas wrote in a note.

Italy is due to sell up to 4.5 billion euros of bonds later on Thursday. The bond sale comes a day after the country's one-year borrowing costs hit a six-month high of 3.97 percent at a debt auction.

However, traders said there is little conviction in the market as the overarching focus is on Greece's election this weekend.

Canada's finance minister said the results have the potential to create a "disruptive moment" on the eve of the G20 summit in Mexico, but that policymakers will deal with that problem if it arrives.

The election outcome is too close to call for now. Syriza, the leftist party opposed to austerity measures, and the New Democracy group, which backs Greece's international bailout, are locked in a tight race.

Against the yen, the euro stood at 99.90, not far off an overnight peak around 100.11. The dollar fetched 79.45 yen, having traded in a slim range of 79.30 and 79.75 on Wednesday. Reflecting a firmer euro, the dollar index drifted down to 82.143 from a session high of 82.581.

Commodity currencies had a tougher time with the Australian dollar once again retreating from parity against the greenback. It last stood at $0.9951.

The New Zealand currency slipped to $0.7763 from a one-month high of $0.7808. The kiwi lost a few pips after the Reserve Bank of New Zealand said a weak economy and an uncertain global outlook meant rates need to stay at record lows.

As expected, the RBNZ kept rates unchanged at 2.5 percent for a 10th straight meeting.

"We didn't think the Reserve Bank would cut rates, but that they would be ready to react strongly if we did get quite a serious development in the European debt crisis," said Nick Tuffley, chief economist at ASB Bank.

"They are waiting to see what that outcome will be. If Europe continues to muddle through, we don't believe rates will go up until March next year at the earliest."