TOKYO, June 23 (Reuters) - The dollar and the yen were broadly steady on Wednesday while the euro and high-yielders were on the defensive as a recent risk rally appeared to have run its course and the euphoria from China's new yuan policy waned.
Trading the dollar based on the short-term direction of the yuan and its mid-point fixing had become a market fad this week, in the wake of China's decision to loosen the yuan's 23-month-old peg to the U.S. dollar.
But traders said such trading interest was ebbing after the yuan fell on Tuesday on hefty dollar purchases by state-owned banks, which suggested the central bank was trying to create two-way trade and check the yuan's gains.
Instead, a sharp fall in U.S. stocks .SPX the previous day and a subsequent drop in the Nikkei .N225 helped support the dollar and the yen, which are favoured when risk aversion spikes and doubts over the health of the global economy emerge.
It continues to be hard for anyone to take long euro positions, said Masafumi Yamamoto, chief FX strategist at Barclays in Japan.
The euro could come under renewed downward pressure in the near term. I think the risk of the euro falling below $1.200 or $1.1900 to test its recent low is still there.
The euro is now hovering close to a support area near $1.2255.
That level marks a 38.2 percent Fibonacci retracement of the euro's recent rally from its four-year low of $1.1876 hit in early June on trading platform EBS to a one-month high of $1.2490 marked on Monday.
A clear break below that level could open the way for a drop towards $1.2145 to $1.2165, an area where the euro hit a number of intraday lows in mid- to late-May.
The euro held steady from late U.S. trading on Tuesday at $1.2271 EUR=, having dipped to as low as $1.2244 earlier.
Against the yen, the euro edged down 0.1 percent to 110.96 yen EURJPY=R after sliding nearly 1 percent on Tuesday.
EURO ZONE'S BANKING SECTOR
An earlier dip in the Australian dollar paused after China set the yuan's mid-point at 6.8102 per dollar, slightly higher than Tuesday's close at 6.8136, but the overall impact was limited.
The Australian dollar edged down 0.1 percent to $0.8709 AUD=D4, having backed off a one-month high of $0.8860 hit earlier this week.
One factor tempering appetite for risk currencies and the euro was a renewed focus on problems in the euro zone and the global economy.
Worries about the euro zone's banking sector returned to the fore after French bank Credit Agricole (CAGR.PA) pushed back profit targets for its struggling Greek unit Emporiki (CBGr.AT) and said it will take a 400 million euro ($536.7 million) write-down as Greece fights its debt load. [ID:nLDE65L0NB]
A ratings downgrade of French bank BNP Paribas by Fitch and S&P's announcement on Monday that it had raised estimates for loan losses for Spain's banking sector were also likely to weigh on the euro.
The dollar index, which measures the dollar's value against a basket of currencies, held steady at 86.08 .DXY, having pulled up from a one-month low of 85.091 marked on Monday.
The dollar dipped 0.1 percent against the yen to 90.49 yen JPY=.
The two-day Federal Open Market Committee will take centre stage later on Wednesday.
The Fed is expected to restate its intention to keep rates near zero and perhaps offer a less upbeat outlook. Traders will keep an eye on what they may say about the impact of Europe on the U.S economy. (Additional reporting by Anirban Nag and Reuters fx analyst Krishna Kumar in Sydney, Satomi Noguchi and Rika Otsuka in Tokyo; Editing by Joseph Radford)