* Euro retreats from highs as traders take profit
* Corruption scandal in Spain, Italy election worries hurt
* Markets cautious ahead of ECB meeting Thursday
* Yen selling eases, while AUD awaits RBA rate decision
* Euro/dollar down 0.2%, dollar/yen flat
By Hideyuki Sano and Ian Chua
TOKYO/SYDNEY, Feb 5 The euro was on the
defensive on Tuesday as political uncertainty in Italy and Spain
prompted traders to take profits on the currency's stellar gains
so far this year to a 14-month high last week.
Selling pressure on the yen eased off slightly, lifting it
above a 2-1/2-year low against the dollar, though traders said
selling from Japanese investors curbed its gains in Asia amid
entrenched expectations of more monetary easing in Japan.
The euro dipped 0.2 percent in Asia following Monday's 0.95
percent fall to trade at $1.3494, well off a 14-month
high of $1.3711 set Friday.
Immediate support is seen around $1.3484, the peak for 2012,
followed by $1.3255, an area that provided a floor recently.
A selloff in Italian and Spanish government bonds and stocks
on Monday amid growing political uncertainty in the two
countries poured cold water on optimism that Europe is slowly
healing from its debt crisis.
Spanish Prime Minister Mariano Rajoy faced calls to resign
over a corruption scandal, while in Italy the
growing popularity of former premier Silvio Berlusconi was a
worry for investors in the run-up to elections this month.
Still, not many market players think potential political
upheaval could derail the euro zone's efforts to fix its debt
"The euro had been buying on the thinking that the worst was
over for Europe. There's a bit of adjustment yesterday after
aggressive buying but I doubt people will go so far as to go
short in the euro again," said a trader at a European bank.
Traders said euro bulls were already starting to turn
cautious in the lead-up to Thursday's European Central Bank
(ECB) policy meeting.
"The recent drawdown in the ECB's balance sheet as well as
the recent rapid appreciation by the euro, has stoked not only
liquidity concerns, but also concerns that euro zone exporters'
competitiveness may be eroding at a very fragile time," said
Christopher Vecchio, currency analyst at DailyFX.
Vecchio was referring to a recent repayment of a whopping
137 billion euros of ECB emergency loans, which slashed the
amount of cash floating in the euro zone banking system.
"Accordingly, a more neutral tone is expected this week, if
only to offset the prior hawkish tone set forth by the ECB at
the January meeting."
Against the yen, the euro dipped below a key support at
124.62 -- the 23.6 percent retracement of its rally since late
January to a 2-1/2 year high of 126.97 hit last Friday.
But euro buying from Japanese investors helped to support
the euro. The euro last stood at 124.62 yen, flat
from late U.S. levels.
That also helped to steady the dollar at around 92.40 yen
, slightly above late U.S. levels, after its fall on
Traders suspect the yen's downtrend will remain intact with
the Bank of Japan under the most pressure among major central
banks to ease aggressively.
In contrast, the Reserve Bank of Australia is likely to
leave its cash rate steady at 3.0 percent on Tuesday, having
just cut in December. It will announce its decision at 0330 GMT.
Markets have priced in a mere 20 percent chance of a rate
cut, putting the Australian dollar vulnerable to any surprise
move by the central bank.
The Aussie stood at $1.0442, flat on the day holding
well within its prevailing $1.0360/0480 range.