Euro squeezed higher ahead of euro zone GDP data

A machine counts and sorts out euro notes at the Belgian Central Bank in Brussels October 26, 2011.

SYDNEY (Reuters) - The euro held onto most of its gains in early Asian trade on Tuesday, having been swept higher by a wave of short covering overnight in a move exaggerated by thin market conditions.

Traders said there was no particular trigger, although persistent hopes for European Central Bank action next month and recent weak economic data out of China prompted an unwinding of short euro/aussie, euro/kiwi positions.

The euro last stood at $1.2333, up from Monday's low around $1.2262. It rose to 96.57 yen, pulling further away from a one-week low around 95.72 plumbed Friday.

Against the Antipodean currencies, the euro hit a two-week high of NZ$1.5282 and it gained nearly 1 percent on the Aussie to A$1.1755.

Traders warned the euro's newfound strength may be tested later in the day when euro zone growth data is released. Economists polled by Reuters expect the region's economy to contract by 0.2 percent on the quarter, following a flat first quarter.

"The single currency may come under pressure over the next 24-hours of trading should the economic docket highlight a growing threat for a prolonged recession," said David Song, currency analyst at DailyFX.

Then again, the weaker the data was the more chance there could be of aggressive action from the ECB.

Also due later are U.S. retail sales data for July, which will offer an important update on how consumer demand fared at the start of the third quarter.

The bounce in the euro saw the dollar index .DXY dip to 82.435, retreating from a one-week high of 82.870 set on Friday. However, the greenback was little changed on the yen at 78.34, still stuck in a tight 78.00-78.80 range.

Investors also took profit in the Aussie against the U.S. dollar, knocking it to $1.0518 from a 4-1/2 month high around $1.0615 reached last week. Immediate support is seen around $1.0500, followed by $1.0460, the 20-day moving average.

There is no major economic data in Asia and trading is expected to remain choppy in thin conditions, with the Northern Hemisphere summer lull well and truly here.

(Editing by Wayne Cole)