FOREX-Euro near 7-week high, policy optimism persists
* Euro holds gains vs dollar, trades near 7-week high
* Market expecting constructive outcome to Greek talks
* Speculation of ECB action fans euro demand
By Nia Williams
LONDON, Aug 22 (Reuters) - The euro held steady versus the dollar on Wednesday, trading close to Tuesday's seven-week high, and was expected to hold its gains on speculation euro zone policymakers are readying action to stem the debt crisis.
Expectations have built in recent weeks that the European Central Bank will announce at its next policy meeting on Sept. 6 plans to help lower Spanish and Italian bond yields.
Before that, Greek Prime Minister Antonis Samaras will meet Eurogroup chief Jean-Claude Juncker on Wednesday and German Chancellor Angela Merkel and French President Francois Hollande in coming days, and is expected to broach the idea of giving Greece more time to implement unpopular budget cuts.
"Any comments that are constructive, giving Greece at least a chance to get an additional bailout package, is something that could support the euro further," said Ulrich Leuchtmann, head of FX research at Commerzbank.
The single currency was steady at $1.2471, close to Tuesday's seven-week high of $1.2488.
Commerzbank's Leuchtmann said the euro may struggle to rise much further beyond the mid-$1.20s given numerous risk events looming in September.
After the ECB meeting, Dutch elections and a German Constitutional Court ruling on the euro zone bailout fund are scheduled for Sept. 12 and European Union finance ministers meet on Sept. 14 and 15.
Growing speculation that the ECB will soon take action to help tackle the debt crisis has lifted demand for the euro but also increased scope for disappointment, analysts said.
A British newspaper report on Tuesday supported a weekend German report that the ECB plans to help Spain and Italy reduce their high public debt.
"The euro has risen not on action but on expectations about what the ECB could do, but it remains to be seen if these expectations are followed up with action," said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.
"We don't know how long these expectations can keep pushing up the euro, and in the meantime, it remains vulnerable to any bad news," Murata said.
Strategists at Morgan Stanley said in a note they expected policy activity to gain momentum in coming days and the euro to test $1.26-$1.27 in the near term. They recommended using any fall towards $1.2415 -- the 38.2 percent retracement of this week's rally -- as a buying opportunity.
BROAD EURO STRENGTH
The euro rose 0.1 percent against the yen to 98.97 yen, near a seven-week high of 99.18 yen hit on Tuesday.
The dollar was nearly flat against the yen at 79.33 yen , down from a five-week high of 79.66 yen hit on Monday. However, since last week it has remained solidly above its 14-day moving average, now at 78.82 yen.
Market players will also focus on the release of minutes from the latest U.S. Federal Reserve meeting later on Wednesday. Any hints policymakers are considering another round of monetary easing to boost growth in the world's largest economy would be likely to weigh on the dollar.
The Australian dollar was down about 0.3 percent against the U.S. dollar at $1.0449, but holding above a three-week low of $1.0411 hit late last week. The Aussie also lost ground against the euro,, which hit a six-week high of A$1.1949 earlier on Wednesday.
Some traders said the fall in the growth-correlated Australian dollar was partly due to global mining giant BHP Billiton saying it would delay a $20 billion copper project, as a result of slowing growth in China.
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