FOREX-Euro, commodity currencies firm after Dow rally
* Wall Street rally boosts risk sentiment
* Euro retains gains but still faces pressure ahead of ECB
* Bets on range-trade in yen grow popular, implied vols down
* Aussie benefits from Australian growth data
By Hideyuki Sano
TOKYO, March 6 (Reuters) - The euro and commodity currencies held firm off their recent multi-month lows on Wednesday, underpinned by improved risk appetite that saw the Dow Jones Industrial Average hit a record closing high.
The euro, however, still has some way to go before it breaks above its downtrend since early February, with European Central Bank President Mario Draghi's stance seen as holding the key to its near-term outlook.
"There's reasonable downside to the euro. The situation in Italy is still uncertain," said Bill Diviney, currency strategist at Barclays.
"Although we don't expect any big changes to President Draghi's stance but he's going to stay fairly dovish given uncertainties."
The euro gained 0.1 percent in Asia to $1.3065, extending its recovery from a six-week trough of $1.2966 set on Friday. Sterling was a touch firmer at $1.5145, edging back from Friday's 2-1/2 year low of $1.4985.
The currency moves were against a backdrop of improved risk appetite as stocks in Europe and the United States rallied, driving the Dow Jones to new heights.
Signs of a strengthening U.S. economy, continued support from the Fed, and plans for record Chinese government spending to sustain growth in China seemed to have given investors fresh confidence to take risk.
Some market players said the euro was also helped by news that Italian President Giorgio Napolitano is considering appointing a new technocrat government led by a non-politician as one way out of Italy's political stalemate.
Still, investors tracking the euro and sterling are taking a more cautious stance in case the ECB and BoE do surprise with fresh stimulus measures at their respective meetings on Thursday.
NO STORM BEFORE APRIL
The yen gained 0.15 percent to 93.16 per dollar but traders see limited scope for further gains in the yen.
"Because Japanese policymakers have made it clear that it will keep aggressively easing, there will be fresh selling when it gains," said Koichi Takamatsu, forex manager at Nomura Securities.
The Bank of Japan kicks off its two-day policy-setting meeting on Thursday but the central bank is expected to hold fire this week and the market's attention is moving to gathering on April 3-4, the first policy review under new governor Haruhiko Kuroda.
Investors expect Kuroda, who is expected to be formally appointed as governor after confirmation by the parliament, to inject fresh blood determined to defeat deflation.
Still, as investors had already sold the yen for months in anticipation of aggressive policy action, the Japanese currency has been trapped in a range since Feb. 25, when it hit a 33-month low of 94.77 yen per dollar.
In fact, one increasingly popular strategy is to bet on the dollar/yen moving between 90-91 and 95 yen until April 4, the BOJ's likely first policy review under Kuroda, using option strategies such as a short straddle or a strangle.
That helped the dollar/yen's implied volatility to ease, with one-month volatility at around 11.7 percent, compared to a 1 1/2-year high around 13.5 percent hit last week.
The Australian dollar was a big beneficiary of rising risk appetite, gaining 0.25 percent on the day to $1.0284, extending its recovery from an eight-month low of $1.0116 hit on Monday.
The Aussie was also helped by data showing moderate economic growth in Australia, supporting views that interest rates will remain steady rather than fall in the near term.
The Canadian dollar edged up 0.1 percent, though a big focus is on a policy announcement by the Bank of Canada at 1500 GMT. Some market players are expecting the bank to tone down its previous hawkish stance following disappointing economic data.
"The interest rates market appears to be pricing in about 30 percent chance of the Bank of Canada dropping its tightening policy bias. If the bank sticks to a tightening bias, there will be a huge gain in the Canadian dollar," said a Western bank trader.
The Canadian dollar traded at C$1.0262 to the U.S. dollar, off Friday's eight-month low of C$1.0343 per dollar.