* Aussie drops after RBA cuts policy rate
* Euro softens after dovish comments from ECB head
* Draghi says ready to cut rates further if needed
* Yen steps up after Japanese holidays but seen staying on defensive
By Ian Chua and Hideyuki Sano
SYDNEY/TOKYO, May 7 (Reuters) - The Australian dollar slumped to a two-month trough on Tuesday after the Reserve Bank of Australia cut rates to a record low, while the euro remained capped as the common currency was unable to shake off dovish comments from the European Central Bank chief.
The yen bounced back from a 10-day low versus the dollar on Japanese exporters’ buying after a long weekend in Japan, though many traders expect the currency to stay under pressure after a solid U.S. job report last week.
The big mover was the Australian dollar, which fell 0.7 percent to $1.0181 after RBA cut rates by a quarter of a percentage point to 2.75 percent citing a historically high Aussie dollar.
The market had been evenly divided on the chance of policy easing on Tuesday.
The Aussie broke through a support around $1.0220 and fell as to $1.0178, its lowest since March 4. The low that day of $1.0116 is seen as an important support.
“I think really what seems to have driven it is inflation trending lower than expected, giving them scope to move and to cut,” said Su-Lin Ong, senior economist at RBC Capital Markets.
“I think in an environment where you’ve got pretty modest growth in Australia, risk reward favours lending a bit more support. They’ve just done it a month earlier than we thought.”
The common currency was at $1.3084, little changed on the day after having pulled back from Monday’s high of $1.3141. It fell as far as $1.3053 after the head of the European Central Bank (ECB) reiterated the central bank’s readiness to cut interest rates again if needed.
In a speech in Rome, ECB President Mario Draghi said the bank would monitor incoming data closely and be ready to cut rates further, including the deposit rate currently at zero.
“For southern European countries, a euro above $1.30 would be too high for their economy. Among major central banks, the ECB has been the only bank that is not expanding its balance sheet. But It will likely consider such a step,” said Minori Uchida, chief FX analyst at the Bank of Tokyo-Mitsubishi UFJ.
Initial support for the euro is seen around $1.3024, the 76.4 percent retracement of its April 24-May 1 rally and the 55-day moving average at $1.3021.
Vassili Serebriakov, strategist at BNP Paribas, said further downside risks for the euro are likely to be limited thanks to ongoing significant support from European market sentiment.
“Both European financial equities and the core-periphery spreads have been moving in a favourable direction and indicate that EUR/USD can potentially strengthen to the 1.34-1.35 area.”
The common currency also ceded a bit of ground against the yen, slipping to 129.72 from Monday’s session high of 130.40 and off a 3-year high of 131.10 set last month.
The pullback in the euro saw the dollar index drift up to 82.244 from Monday’s low of 81.982, helping keep it well away from last week’s 2-month trough of 81.331.
The greenback gave up some of its recent gains against the yen as Japanese traders returned to the market after the four-day long weekend.
The dollar slipped 0.2 percent to 99.11 yen, after having risen as high as 99.455 on Monday on the back of the upbeat U.S. jobs data last Friday.
Still, many market players think the currency is gearing up for another go at tough resistance at the 100 level, which it has failed twice to pierce last month even as the Japanese currency came under constant pressure from the Bank of Japan’s aggressive monetary easing last month.