* Euro retreats from 1-mth high vs dlr, Aussie trims gains
* Yuan makes minimal headway after China pledges freer moves
* Euro short-covering rally loses steam
By Naomi Tajitsu
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's pledge to allow its currency to trade more freely had spurred risk demand.
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. [ID:nTOE65L04K]
Looser yuan controls are seen as positive for the global economy as they will help address global imbalances and cool Chinese inflation risks.
But analysts said the view the yuan's gains would be modest prompted investors to put on 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 weighed down the euro [ID:nN21250262] [ID:nLDE65K1TE].
By 0914 GMT, the euro EUR= traded at $1.2288, slightly lower on the day and near 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.
Market participants said the euro would face more losses, but technical analysts said near-term support was seen at $1.2253, a 38.2 percent Fibonacci retracement of the rise from a four-year low around $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 business sentiment, which hit a two-year high in June, while the expectations index was slightly weaker than forecast. [ID:nBAE003791]
EASING POLITICAL TENSIONS
The Australian dollar AUD=D4 was little changed at $0.8763, staying off $0.8860 hit on Monday, its strongest since mid-May.
The commodity-linked Australian unit is seen benefiting from a stronger yuan on the view that a firmer Chinese currency will boost purchasing power and increase demand for the natural resources China needs to further develop its economy.
The dollar index .DXY was a touch higher at 86.066, having reversed a fall to a one-month low on Monday. Analysts said this suggested more gains for the greenback in the near term.
Still, the dollar JPY= was nearly half a percent weaker at 90.55 yen as the Japanese currency rose across the board.
The yuan slipped even as China has indicated it would let it rise further after Monday's surge, but analysts pointed out that the move by Beijing's central bank had helped to quell political tensions before a Group of 20 meeting later this week.
BTM UFJ analysts said in a note that bilateral trade tensions between the U.S. and China had now diminished considerably.
"The G20 meeting now in Canada should proceed smoothly while the release of the semi-annual currency report by the U.S. Treasury department after the summit can now be released without citing China as a currency manipulato," the analysts said.
They added that the looser yuan policy should in time have the biggest impact on Asian currencies, while it would have a much more muted impact on the majors. (Editing by Stephen Nisbet)