LONDON, June 22 (Reuters) - The euro retreated from a one-month high against the dollar on Tuesday, tracking a pullback in the yuan a day after China pledged to allow its currency to trade more freely.
Upward momentum seen on Monday in the euro and higher-risk currencies including the Australian dollar petered out as investors acknowledged that a more flexible yuan policy would not lead to a sharp appreciation in the currency.
The yuan's daily mid-point CNY=SAEC was set at 6.7980 per dollar on Tuesday, the highest since its July 2005 revaluation but the Chinese currency relinquished gains as big, state-owned banks heavily bought dollars.
Looser yuan controls are seen as positive for the global economy as they will help address global imbalances and cool Chinese inflation risks. China's central bank has indicated it would let the yuan rise further after the previous day's surge.
But analysts said the view the yuan's gains would be subtle prompted investors to pause the euro's short-covering rally in the wake of the single currency's tumble to a four-year low against the dollar earlier this month.
A moderate appreciation of the yuan will not change China's current account situation and it won't imply the end of global imbalances, said Ulrich Leuchtmann, currency strategist at Commerzbank in Frankfurt.
Therefore there is no reason for a significant impact on the euro/dollar or dollar/yen, he said. It would have to be quite a large revaluation to have a lasting impact on the majors.
Analysts said a ratings downgrade of French bank BNP Paribas by Fitch and S&P's announcement it was raising its estimates for loan losses for Spain's banking sector on Monday also helped weigh down the euro.
By 0726 GMT, the euro EUR= traded at $1.2318, unchanged on the day after hitting the day's low of $1.2285. The single currency pulled back from $1.2490 hit on Monday, its strongest since May 24, after failing to break into the $1.25 region.
Near-term support was seen at $1.2253, a 38.2 percent Fibonacci retracement of the rise from a four-year low of $1.1875 on June 7 to Monday's high.
The euro barely reacted to the German Ifo index, which showed a higher-than-expected reading of the business climate and current conditions, while the expectations index was slightly weaker than forecast.
The Australian dollar AUD=D4 traded 0.4 percent higher at $0.8787, but stayed off $0.8860 hit on Monday, its strongest since mid-May.
The commodity-linked Australian unit is seen benefiting from a stronger yuan, in part as it may help to boost demand for the natural resources China needs to further develop its economy.
The dollar index .DXY was flat at 85.885, having reversed a fall to a one-month low on Monday. Market participants said this suggested more gains for the greenback in the near term. The dollar JPY= was up 0.3 percent at 90.77 yen. (Editing by Mike Peacock)