FOREX-Euro falls on caution before Slovak EFSF vote

 Slovak coalition remains split on EFSF vote


* But positioning may lead to further short squeeze


- The euro dipped on Tuesday on caution over a Slovak vote on changes to the euro zone's rescue fund but held in positive territory for the week as hopes for a solution to the debt crisis triggered a squeeze of short positions in the currency.


The Slovak ruling coalition remained split over a deal to broaden the EFSF and any delay in passing the legislation could dent sentiment towards the euro.


"The general view is 'by hook or by crook the Slovaks will get this deal through', though they may have to rely on the opposition to so," said ING currency strategist Tom Levinson.


Slovakia is the last of the euro zone's 17 members still to ratify changes to the 440-billion-euro European Financial Stability Facility.


The euro was down 0.3 percent on the day at $1.3600, but it stayed well above last week's low around $1.3145. It surged 2 percent on Monday for its biggest daily percentage gain in 15 months, hitting $1.3698.


Monday's rally followed a Franco-German pledge to do what was necessary to shore up banks, settle the Greek crisis and accelerate euro zone economic coordination.


This prompted investors to take profit on hefty short euro positions that had built up, and analysts said there was still scope for further short covering to lift the euro.


"At least for the moment the case to continue selling the euro has disappeared," said Richard Falkenhall, currency strategist at SEB in Stockholm.


SEB forecasts the euro at $1.38 within a month, but Falkenhall said gains would be gradual, with any rise likely to encounter some profit-taking.


Data from the U.S. Commodity Futures Trading Commission showed currency speculators increased their net short positions in the euro to 82,697 contracts in the week ended Oct. 4, the biggest in four months.


"The euro can go higher because short positioning is still extreme. Monday's rally only partially offset that position." said Manuel Oliveri, currency strategist at UBS in Zurich.


Traders cited decent bids for the euro from $1.3570 down to $1.3550, which could help cap its falls.


However, major resistance was seen at $1.3680-90, the 38.2 percent Fibonacci retracement of the $1.4550/$1.3145 move and the Sept. 28 high. Traders reported offers around $1.3670 and more ahead of a $1.3700 option barrier.


LASTING RALLY UNLIKELY


A lasting euro rally was seen unlikely, however, with uncertainty over EU policymakers' plans to recapitalise banks, in the face of expectations that Greece could default, keeping investors wary.


Risk-reversals, a measure of the premium required to hold bets on a currency falling or rising, showed investors still hedging against a weaker euro. The one-month 25-delta risk-reversal traded around 2.55 in favour of euro puts, compared to 2.80 at the end of last week.


Among growth-linked and perceived higher risk currencies, the Australian dollar fell 0.35 percent to $0.9951 , giving back some gains after climbing 2.4 percent on Monday, its biggest one-day rally since June 2010.


The Aussie faces stiff resistance at $1.0035 -- a 38.2 percent retracement of its slide from a $1.1081 high in late July to a $0.9388 low plumbed in early October.


The U.S. dollar was down 0.7 percent against the Swiss franc to 0.9097 francs after falling more than 2 percent on Monday when the U.S. currency came under heavy selling pressure as equity markets rose and appetite for risk improved.


Against the yen, the dollar held steady at 76.63 yen , not far from a record low around 75.94 struck in August.