* Aussie hits 8-mth highs after RBA sticks to steady rates message
* Sterling flirts with six-year highs on upbeat manufacturing report
* Yellen speaks later Wednesday, ECB rate decision & US payrolls loom
By Ian Chua
SYDNEY, July 2 The Australian dollar hovered near an eight-month peak early on Wednesday, having been swept higher by a short squeeze while an upbeat manufacturing survey helped power sterling to levels not seen in nearly six years.
Both currencies easily outperformed their global peers, leaving the U.S. dollar to eke out small gains on the euro and yen as U.S. Treasury yields rose.
The dollar index drifted up to 79.811 from a two-month trough of 79.740. Against the yen, the greenback edged up to 101.54 from Tuesday's low of 101.29.
The euro slipped to $1.3682 from a six-week high of $1.3710 and trimmed gains on the yen that saw it retreat to 138.89 from a three-week high of 139.14.
Traders said there were some worries among euro bulls that the European Central Bank (ECB) might try to talk down the currency on Thursday after its policy meeting.
The euro has gained about 2 U.S. cents in three short weeks, a move that is likely to frustrate the ECB. President Mario Draghi recently warned that a strengthening currency in a low inflation environment was cause for serious concern.
Still, with the ECB unlikely to inject more stimulus a month after delivering wide-ranging measures, analysts said the euro shouldn't fall too far.
"On EUR/USD, the medium-term view is still one of a lower exchange rate given the monetary policy divergence," analysts at JPMorgan wrote in a note to clients.
"But in the near-term EUR/USD should remain in a range given that the ECB will not announce any additional policy measures and a hawkish Fed seems to be a fair distance away."
Expectations had also run high among Aussie dollar bears on Tuesday that the Reserve Bank of Australia (RBA) might sound a bit more dovish or try to jawbone lower the stubbornly high local dollar.
When the RBA did not oblige and stuck to its message that rates will remain steady, investors quickly unwound negative positions.
"There were some expectations that the RBA might, if it wanted to, be more dovish on some sectors of the economy, but they were not and AUD broke above the year's highs," said Emma Lawson, senior currency strategist at National Australia Bank in Sydney.
The Aussie jumped almost a cent to above 95 U.S. cents for the first time since early November. It last traded at $0.9493.
If it holds atop $0.9498, the 76.4 percent retracement of its October to January fall, the market will next target $0.9544, the November high, traders said.
Investors also warmed to sterling after a survey showing British manufacturing growing at its fastest in seven months added to the case for a rise in interest rates this year.
The pound scurried to $1.7167, its highest since October 2008. A return to $1.7322 will mark its 50 percent retracement of the late-2007 to early-2009 tumble from $2.1162 to $1.3500.
Asia will be hard pressed to find fresh inspiration on Wednesday with little in the way of major economic news.
Later in the session Federal Reserve Chair Janet Yellen gives a speech on "Financial Stability" at an event hosted by International Monetary Fund Director Christine Lagarde. (Editing by Shri Navaratnam)