* Euro broadly higher, short squeeze continues
* Intervention fears heighten risk aversion
* Australian dollar jumps 2 pct, trims steep losses
(Adds details, updates prices)
By Naomi Tajitsu
LONDON, May 21 (Reuters) - The euro rose broadly on Friday
as investors wary of holding too many short positions following
its heavy sell-off scrambled to take off those trades, while
fears of currency intervention loomed over the market.
In volatile trade, the Australian dollar jumped 2 percent
against the dollar, paring losses after its steep fall this
week, on chatter that Australia's central bank may intervene to
support the currency. The RBA said it does not comment on market
movements.
Investors were jittery about holding significant positions
in the euro and other currencies given some market-moving
announcements have been made on weekends this month. A task
force of European finance ministers meet in Brussels on Friday.
A stampede out of the euro amid worries about the economic
impact of the euro zone debt crisis drove the single currency to
a four-year low versus the dollar this week and has pushed net
short positions in the European currency to a record high.
Analysts say investors are realising the dangers both of
holding too many or too few euros, particularly given
speculation that authorities may prop up the currency.
"The market has a clear view that the euro will be trending
lower, but by holding that position you are vulnerable to any
possibility of intervention," said Daragh Maher, senior currency
analyst at Credit Agricole CIB, adding that such fears had
extended the euro's short squeeze in the past few days.
"The intervention threat doesn't have to feel realistic,
when the market is an extreme position, even just a muttering
can cause a reaction."
The euro has fallen roughly 6 percent so far this month, and
its steep decline has cranked up speculation that European
officials may be concerned about its level.
Eurogroup Chairman Jean-Claude Juncker said on Thursday he
did not see the need to take immediate action on the euro's
decline, but speaking in Tokyo, he said he discussed its decline
with Japan's finance minister. []
On Friday, the euro <EUR=> climbed as high as $1.2673 on
electronic trading platform EBS in early trade, before pulling
back to $1.2500 by 1054 GMT up 0.3 percent on the day.
It tumbled as low as $1.2143 earlier this week after Germany
banned naked short selling in some securities, fuelling
speculation about other possible market regulations.
The euro is poised to end the week roughly 1 percent higher
against the dollar, following five consecutive weeks of losses.
AUSSIE GAINS
Analysts said heightened fears about risk had prompted a
rush to square positions -- long and short -- in currencies
which are high-risk or less liquid.
"Risk aversion has risen so rapidly that in order to protect
their books, investors are just closing positions and
repatriating capital," said Carl Hammer, currency strategist at
SEB in Stockholm, adding: "It's a snowball effect."
Risk aversion soaked up liquidity, resulting in choppy trade
and aggravated currency movements.
Against the Swiss franc, the euro <EURCHF=> traded 0.5
percent higher at 1.4430, having recovered sharply from a slide
to an all-time low of 1.3995 francs earlier in the week.
The Australian dollar <AUD=D4> rose 2 percent against the
U.S. dollar to $0.8318, pulling back from $0.8085 hit on
Thursday, its weakest since July 2009.
Germany's lower house of parliament approved a bill to allow
Berlin to contribute to the European rescue aid for Greece and
other euro zone nations plagued by debt problems.
[]
European Central Bank President Jean-Claude Trichet
meanwhile underlined the need for fiscal tightening, saying
Portugal, which many in the market fear risks contagion from
Greece's debt problems, urgently needs fiscal sustainability.
[]
However, the difficulties facing debt-ridden states in
tackling high deficits were highlighted by media reports that
Spain's union will probably call a general strike to protest the
government's economic policy. []
(Editing by Nigel Stephenson and Susan Fenton)
