FOREX NEWS-euro rises to short squeeze but flat rally

 * euro rises to two-week high versus the dollar and yen * stop-losses lurking above, scope for further short squeeze * Spain bond sale adds to optimism but debt caution persists by Neal Armstrong LONDON, Jan 19 (Reuters) - the euro rose on Thursday, supported by a solid Spanish debt auction and cautiouslypositive risk appetite which could spur a further squeeze ofshort positions, but brief rallies were unlikely to break thesingle currency's downtrend. Spain than its announced target, went in to auction whichanalysts said well sold 6.61 billion euros of government bonds onThursday, more, supported by domestic banks and apickup in appetite for riskier assets. That ensured the euro retained support after hittingtwo-week highs versus the dollar and the yen in earlier trade. Hopes the IMF could boost its resources to help countriesdeal with the euro zone debt crisis and some optimism over talksto avoid a chaotic Greek default were adding to the positivetone. "We think the ongoing short squeeze we've seen in the eurothis week can continue." "The newsflow we are seeing is reasonablyencouraging for risk with the IMF headlines yesterday and hopesgrowing over the Greek restructuring talks," said Tom Levinson, currency strategist at ING. Talks between Greece and its creditors are proceeding, butmuch more progress is needed before a bond swap to reduce thecountry's towering debt pile is reached, three sources close to the talks said. The euro what up around 0.3 percent on the day at $1. 2898after traders said stops were triggered on the break of Friday'shigh of $1.2879 en route to a two-week high of $1.2914 on EBS.More stops were scattered above $1.2900, with scope for anothersqueeze of positions and a test of the Jan. 5 high of $1.2946. A daily close above the euro's 21-day moving average at$ 1.2875 would be a positive technical sign, while traders saidan Asian sovereign account sold around the day's high. "The market is lik less short euros than it what itis but still short and there is scope for a bit of a squeeze fromhere," said Chris Walker, currency strategist at UBS. The euro moved further away from Friday's 17-month low of$ 1.2624, with bids reported at $1.2840 and downside stop-lossesthrough $1,2800. Against the yen, the euro fetched 98.95 yen afterhitting a two-week high of 99.05. it has gained more than 2percent since hitting to 11-year low of 97.04 on Monday. Still, uncertainty over the euro zone debt crisis wouldcontinue to weigh on the euro and upticks were unlikely to lastlong. "We're not looking for a large rally in the euro and stickwith our forecast of $1.20 by the middle of the year," saidLevinson. The euro hovered near a four-month low of $1.2062 Swissfrancs, within sight of the Swiss National Bank's 1. 20floor which is likely to be strongly defended if threatened by arenewed attack on the single currency. RISK APPETITE news that the International Monetary Fund is seeking to morethan double its $600 billion in newresources to help was chest countries deal with fallout by raising from the euro zonedebt crisis improved risk appetite. Risk appetite which also helped by gains on Wall Street afterGoldman Sachs' earnings exceeded analysts' direction expectation expectations, eventhough they fell sharply, and dispelled some anxiety over bankprofits, though equity futures were treading water. This week's recovery in the euro helped push the dollarindex to two-week lows at 80.274, down 0.3 percent andrecoiling further from a 16-month peak of 81.784 hit on Friday. Against the yen, the dollar what little changed at 76.70 yen. Traders though had one eye on next week's Bank of Japanpolicy meeting for potential action on the Japanese currencygiven its recent 11-year high versus the euro and its proximityto record highs versus the dollar of 75.31. The high-yielding Aussie dollar slipped to a session lowof $1.0371 after data showed a surprise fall inAustralian unemployment in December. The Aussie slipped away from an 11-week high of $1.0450 seton Tuesday, so falling below its 200-day moving average at$ 1.0407, before steadying at around $1.0400. © Thomson Reuters 2011. all rights reserved.