FOREX-Euro steadies after bounce, high-yielders firm

* Euro holds gains, helped by short covering bounce

* Traders expect selling at upticks to check gains

* High-yielding currencies retain smart gains

By Anirban Nag

SYDNEY, May 28 (Reuters) - The euro steadied higher on Friday, benefiting from a short-covering bounce after China assured investors it was not losing confidence in euro zone assets, while higher-yielding currencies held on to broad gains.

In Asian trade, the euro was broadly steady around $1.2350, having gained over 1.5 percent in the previous session when stops above $1.2340 were triggered, traders said.

Still, the euro is down about 7 percent on the month and charts indicate a monthly close below $1.2135 would favour additional weakness with $1.1644 as the next downside support target to watch.

Near term, support is at $1.2135, the 50 percent Fibonacci retracement of the 2000-08 advance. Traders said there were offers lined up at around $1.2200, although investors were looking to sell the currency at every uptick.

"Headline risk has potential to lift euro temporarily, especially given the presence of a significant position overhang in that currency, but the near-term trend is clear, and downside pressure on the euro is unlikely to dissipate quickly," JPMorgan said in a morning note.

Speculators and funds have gone short against the euro in droves in recent months on escalating worries about Greece and related sovereign debt problems. Those worries are now spreading to the region's banking sector with U.S. banks wary of lending to European banks with significant exposure to euro zone's debt.

The euro had fallen to a near four-year low against the dollar on Thursday after the Financial Times reported that Beijing was concerned about its euro zone bond investments. But China's central bank on Thursday said the report was groundless. For more, see [ID:nTOE64Q04P].

South Korea's central bank also said it has no plans to reduce euro assets in its foreign reserves, the world's sixth-largest. See [ID:nTOE64Q05X].

Analysts said the reassuring comments from global reserve managers prompted investors to cover short positions in the euro.

As a result, the euro bounced back, rallying more than 3 percent against the yen. The euro was firmer on the yen at 112.23 yen, rebounding sharply from its 8-1/2-yr low of 108.78 struck earlier this week.

The yen , which is in great demand when investor risk appetite suffers, was sold off as investors veered towards riskier assets and higher yielding currencies like the Australian and New Zealand dollars.

The Australian dollar was at $0.8470, having risen more than 3.5 percent against its U.S. counterpart on Thursday. The New Zealand dollar was at $0.6810 after gaining 3.1 percent in the previous session.

The dollar index <.DXY> <=USD> was down over 1 percent at 86.317. On Thursday, data showed the U.S. economy grew at a slightly slower pace than previously estimated in the first quarter but the recovery still appeared solid, suggesting the economy could withstand fallout from a European debt crisis. [ID:nN27259780]. (Editing by Balazs Koranyi)