* Euro tests $1.2200 after stops triggered, squeezing shorts * Aussie pierces first layer of resistance at $0.8552 * Dollar index backs down further from recent high
TOKYO, June 14 (Reuters) - The euro rose on Monday after a burst of short-covering lifted the single currency above $1.22 and further away from a four-year low, but traders were wary about chasing gains and expected its downtrend to continue.
The Australian dollar climbed to its highest in a month above $0.8560, extending a rally from late last week on improved risk tolerance and tackling the first layer in a band of resistance at $0.8550-80 which is blocking its path to higher ground.
With Asian trade thinned by a holiday in Australia, traders said the euro triggered stop-loss buy orders at $1.2160, laying the groundwork for a push above $1.22 as holders of short euro positions bought it back, fuelling the jump.
The euro, locked in a downtrend on worries about euro zone fiscal problems, recovered to its highest level since early June against the U.S. dollar but was expected to meet resistance at its 21-day moving average up at about $1.2230.
I suspect there are euro short positions left in markets so there will probably be a bit more short-covering, said Daisuke Karakama, a market economist at Mizuho Corporate Bank.
But its rebound will run out of gas. There will be an EU summit this week, but European policymakers appear to have run out of policy steps for now.
The market remains wary of euro zone sovereign debt problems and the risks these pose to the banking sector.
The euro has lost 15 percent against the dollar this year but managed to gain 1.6 percent in the course of last week as it pulled up from a four-year low at $1.1876.
It was at $1.2175, up 0.5 percent from late U.S. trade on Friday, after reaching as far as $1.2208.
After the $1.2230 level, it could face resistance at about $1.2329, a bottom hit in October 2008.
European Union leaders meet on Thursday and are expected to make a new attempt to convince markets they can contain debt problems by agreeing on how to tighten economic policy coordination and strengthen budget discipline. [ID:nLDE65C0FB]
SCOPE IN A DOWNTREND
Nonetheless, investors are also wondering how the region's growth will weather the belt-tightening, and data from the Commodity Futures Trading Commission showed speculators boosted their bets against the euro in the week ended June 8, although net short positions were below record levels. [IMM/FX]
With the market still very short euros, Sue Trinh, a senior FX strategist at Royal Bank of Canada in Hong Kong, did not rule out a push up as far as $1.24-$1.25 within its downtrend.
If the moves continue then we could start running into systematic-type stops for the likes of euro/dollar and the DXY (dollar) more generally, she said.
CFTC data showed speculators also increased bets in favour of the U.S. dollar last week, while they cut net long positions in the Australian dollar almost by half.
The Aussie, which fell in April and May as the euro tumbled, breached $0.8552, its highest in a month, and now faces resistance at about $0.8570-80, stemming from a low in February and a 38.2 percent retracement of its April-May drop.
It rose 0.7 percent to $0.8564 after probing as far as $0.8571. It peaked just below $0.94 in April but twice found support at $0.8065-80 and has risen since, making chartists look for signals that it can recover higher.
The Aussie also gained 0.6 percent on the low-yielding yen, which was soft across the board, to 78.69 yen AUDJPY=R, touching its highest in nearly four weeks.
The euro climbed 0.9 percent to 112.02 yen EURJPY=R, its firmest level against the Japanese currency for more than a week.
The rise in yen crosses also pushed up the dollar 0.3 percent to 91.95 yen, putting it above its 30-day moving average.
But the dollar index .DXY, a gauge of its performance against six major currencies, fell 0.7 percent to 86.928, retreating further from a 15-month high above 88.70 set last week and slipping below its 14-day moving average at 87.251.
Sterling edged up against the dollar after dropping sharply on Friday but continued to lose ground against the reviving euro EURGBP=D4.
Britain's new fiscal policy watchdog is due to give estimates later on Monday that are expected to pour cold water on the previous government's hopes for a powerful recovery and offer hints on the scale of spending cuts and tax hikes seen as necessary to rein in the budget deficit. [ID:nLDE65C0O7] (Additional reporting by Hideyuki Sano, Satomi Noguchi in Tokyo and FX analyst Krishna Kumar in Sydney; Editing by Hugh Lawson)