FOREX-Euro steady near 1-month high; Aussie eyes RBA
* Euro hovers close to Monday's 1-month high
* Talk of euro option barrier at $1.2450
* Aussie-dollar bulls eye RBA rate decision
By Masayuki Kitano
SINGAPORE, Aug 7 (Reuters) - The euro held steady near a recent one-month high on Tuesday, supported by hopes that the European Central Bank will take action soon to lower borrowing costs for Spain and Italy.
The ECB last week said it may again start buying government bonds to reduce crippling Spanish and Italian borrowing costs, but details of exactly how it will stabilise the bloc's bond markets have yet to be fleshed out.
Still, hopes the ECB will soon act sparked a global rally in risky assets since Friday and have lifted the euro, and traders and analysts say the single currency may eke out further gains in the near term.
The euro held steady at $1.2400, having hit a one-month high of $1.2444 on Monday on trading platform EBS, its highest level since early July.
"I think the risk or the bias here is perhaps a bit more short squeeze in the euro to the upside," said Sim Moh Siong, FX strategist for Bank of Singapore, referring to the possibility of the euro getting a lift if traders with short positions in the single currency unwind their bearish bets.
The market will be watching to see whether Spain or Italy decide to ask for help from the euro zone's bailout funds, he said, adding that such action could help open the way for the ECB to buy bonds via the new scheme that it is now considering.
The euro is likely to face initial resistance at around $1.2450 to $1.2480, and if it breaks above that area, the single currency could try for levels above $1.2600, he added.
There was some market talk of an option barrier in the euro at $1.2450. The existence of such a barrier suggests that options players may sell the euro if it climbs close to the barrier, but also means the euro's rise could gain steam if the barrier level is actually hit.
Investors continued to favour commodity currencies, with the Australian dollar rising 0.2 percent to $1.0584. The Aussie dollar had climbed to $1.0594 on Monday, its highest level since March 20.
The key focus for Aussie-dollar bulls is the Reserve Bank of Australia (RBA) policy meeting, with a statement due at 0430 GMT. All 20 economists polled by Reuters expect the RBA to keep the cash rate steady at 3.5 percent for a second month.
The RBA has indicated it is happy to sit back and see the impact of past rate cuts before deciding on its next step. It has lowered the cash rate by 125 basis points since November and a recent run of upbeat data, including retail sales, suggested those cuts were having a positive impact on the economy.
There has been speculation the RBA is uncomfortable with the Aussie at such high levels given falling prices for key commodity exports, and could hint at its unhappiness.
David Song, currency analyst at DailyFX, said the market is also keeping an eye out on the RBA's assessment on China, which is Australia's single largest export market.
"As China faces a greater threat for a 'hard-landing', the slowing recovery in the world's second-largest economy may prompt the RBA to strike a highly dovish tone for monetary policy," he said.
The U.S. dollar edged up 0.1 percent to 78.28 yen, staying above a two-month low of 77.90 yen struck last week.
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