* Euro retreats from two-month high against dollar <EUR=>
* Rally on Trichet loses steam, market eyes Ireland
* Euro's new year rally clears speculator shorts -CFTC data
(Adds quote, detail, updates prices)
By Naomi Tajitsu
LONDON, Jan 24 (Reuters) - The euro backed off a two-month
high against the dollar on Monday after an early burst of buying
ran out of steam, while political turmoil in Ireland highlighted
uncertainties facing heavily indebted euro zone countries.
Tough talk on inflation pressures from European Central Bank
chief Jean-Claude Trichet on Sunday helped to push the euro to
$1.3648 in early Asian trade, its strongest since late November.
[]
But a lack of follow-through demand and worries over
political instability in some euro zone countries knocked it
back down.
Investors also focused on Ireland after Prime Minister Brian
Cowan resigned as head of the Fianna Fail party at the weekend,
plunging the country into political turmoil as it tries to pass
a budget bill to access an EU and IMF bailout. []
Analysts said political instability in Ireland raised
concerns about whether the government would be able to approve
the budget bill, and when an election would be called.
The euro <EUR=> was down 0.5 percent on the day at $1.3550,
roughly a cent below its early Asian high. Traders cited selling
demand from a German name and a semi-official European name
hitting the currency.
"The euro's had a sharp rebound recently but we think it's
nearing its top in the bigger picture," said Ian Stannard,
senior currency strategist at BNP Paribas.
"It's supported in the near-term by optimism over talks on
the European rescue fund, but political problems in Ireland and
Portugal show there are still lots of factors out there to hurt
the currency," he added.
The fact that the Socialist party rules without a majority
in Portugal has added to investor concerns over a debt crisis in
the past year and helped push Portuguese bond yields sharply
higher.
The euro has rallied some 6 percent in the past two weeks,
aided by increasing international support for the euro zone's
debt rescue plan and concerns that higher inflation will prompt
a euro zone rate rise in the next few months.
The latter has widened the spread between euro zone and U.S.
bond yields and boosted the euro, but some analysts argue that
weakness in countries including Ireland, Greece and Portugal may
hold the ECB back from raising rates in the near term.
"The euro's rise today was driven by stop-losses, and once
those were taken out there were no more bids in the market,"
said Anders Soderberg, currency strategist at SEB in Stockholm.
Solid data on euro zone industrial orders and a robust euro
zone flash estimate of services PMI failed to lift the currency.
[] []
It hovered within reach of a key technical level around
$1.3570, a 50 percent retracement of its decline from November
to early this month. Technical analysts say it must hold above
that level on a sustained basis to extend its gains.
EURO POSITIONING FLIPS
The euro was flat at 112.35 yen <EURJPY=R>, off a two-month
high of 112.70 hit in earlier trade. Still, it hovered around
its 200-day moving average around 112.23 yen after breaking
above for the first time in 12 months.
The euro's broad rally has cleared out short positions, bets
that the shared currency would depreciate.
The latest CFTC data show IMM euro positions held by
speculators shifted to 4,109 net long contracts last week,
versus 45,182 net shorts the previous week. []
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For a story on the latest IMM data, click on []
Graphic on http://r.reuters.com/kus26k
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The euro's pullback on Monday helped to support the dollar,
which rose 0.3 percent to 82.89 yen <JPY=>, while the U.S.
currency rose 0.3 percent versus a currency basket <.DXY>.
(Additional reporting by Neal Armstrong; Graphic by Scott
Barber; Editing by Catherine Evans)
