* Euro recovers from 1-mth low vs dollar on short-covering
* Euro gains limited ahead of ECB rate decision
* Eyes on U.S. December retail sales figures later in the day
By Kaori Kaneko
TOKYO, Jan 14 (Reuters) - The dollar edged down from a one-month high against the euro on Wednesday but remained underpinned as investors braced for a possible interest rate cut by the European Central Bank later in the week.
The ECB is expected to cut rates by 50 basis points from the current 2.5 percent at a policy meeting on Thursday to help fight a broad economic downturn.
The European single currency's gains against the dollar were also limited due to the recent threat of ratings downgrades for some euro zone countries.
Spain on Monday became the third euro zone country since last week to be warned by ratings agency Standard & Poor's that its credit rating is under threat from the global credit crisis.
"The surrounding environment for the euro is weak and there are no reasons to favour the currency," said Nobuaki Kubo, vice president at BBH Investment Services.
If the ECB does not take drastic easing steps, the euro could be hurt further on a view that the central bank is being too slow in helping the faltering economy, Kubo said.
The euro rose to $1.3279, up 0.8 percent from late New York trade, after hitting a one-month low of $1.3140 on trading platform EBS the previous day.
Against the yen, the single currency gained 1 percent to 119.20 yen. It had fallen as low as 117.13 yen on EBS on Tuesday, the lowest since early December.
Rebounds in Asian shares on Wednesday helped the euro pare some of the previous day's steep losses but investors remained hesitant to go beyond short-covering.
Tokyo's Nikkei share average rose 0.3 percent after a sharp sell-off the previous day.
A recent slump in global stocks has revived risk aversion and prompted investors to move away from higher-yielding currencies and seek perceived safety in units like the yen.
"A trend of risk aversion in the market has not changed on a bleak global economic outlook and the yen is basically in demand," said Satoshi Okagawa, head of the FX forward trading group at Sumitomo Mitsui Banking Corporation.
"But since volatility is high in the market, prices changes could look enormous," Okagawa said.
The dollar was up 0.5 percent against the yen at 89.77 yen.
Demand for the dollar firmed after a U.S. government report on Tuesday showed that the trade gap marked the biggest contraction in 12 years in November, driven by a plunge in imports.
Analysts said the U.S. currency was also supported after a speech on Tuesday by Federal Reserve Chairman Ben Bernanke suggesting how a frayed financial system could be helped. This provided a degree of reassurance that the central bank would act in a responsible manner, they said.
Investors were awaiting whether the dollar could keep a firm footing in the face of fresh U.S. data due later in the day.
U.S. December retail sales figures will be released at 1330 GMT, which will reflect results of the Christmas shopping season, and traders said this could be a reason the greenback's advance stalled against the euro during Asian trading.
Sales at U.S. retailers are expected to post a 1.2 percent fall for December to mark a sixth straight monthly drop after a 1.8 percent decline in the previous month, according to a Reuters poll.
"Following weak sales figures at top U.S. retailer Wal-Mart, the year-end shopping sales are expected to be bleak. This view prevented the dollar from rising further against the yen," a trader at a Japanese bank said.
Traders said the market has priced in weak sales data in the U.S. to some extent given a severe jobs environment but weaker-than-expected results could still prompt investors to sell the dollar.
The Australian and New Zealand dollars crawled back from one-month lows hit on Tuesday when a sharp drop in risk appetite took a heavy toll on the commodity-sensitive currencies.
The Aussie climbed 1.9 percent on Wednesday to $0.6772 after declining to a one-month low of $0.6577 the previous day.
The kiwi gained 0.8 percent to $0.5577. The currency dropped to a one-month low of $0.5460 on Tuesday after a warning by Standard & Poor's that it could downgrade New Zealand's foreign currency rating. (Additional reporting by Shinichi Saoshiro; Editing by Chris Gallagher)