* Euro down 0.2 pct at $1.2667 EUR=
* Euro resistance layered above $1.27
* Canada dollar CAD=D4 surges on strong jobs data
* High-yielders hold gains on improving risk appetite
(Adds prices, Canadian dollar moves)
By Lin Noueihed
LONDON, July 9 (Reuters) - The euro slipped off two-month highs against the dollar on Friday with investors taking profits ahead of the weekend as strategists said its recent rally would peter out due to lingering worries about the euro zone economy.
The biggest mover in European trade was the Canadian dollar CAD=D4, which surged 1 percent against the greenback on a stronger-than-expected improvement in jobless figures.
The single currency was supported in U.S. trade on Thursday by strong German factory data [ID:nLDE6670ZL], a positive U.S. jobs report and more clarity on European bank stress tests, all of which boosted demand for riskier assets such as shares.
"The euro rebound is now running out of steam. It is facing tough resistance at the $1.27 level," Ian Stannard, foreign exchange strategist at BNP Paribas, said.
"We expect it to come back under pressure. Continued concern regarding the stress tests will weigh in the medium term... Overall the picture for euro is negative."
The euro erased gains to trade down 0.2 percent at $1.2667 EUR= at 1121 GMT, after reaching a 2 1/2-month high of $1.2723 on trading platform EBS.
Options with a strike price of $1.2650 set to expire later on Friday were seen supporting the euro, traders said, after it fell to the day's low of $1.2660.
BNP's Stannard said more demand for high-yielding commodity currencies such as the Australian dollar would also hit the euro, which has come to be seen as a funding currency.
Despite its recent rally, the euro zone's debt problems have discouraged investors from taking long positions in the euro.
Some Asian central banks were seen willing to re-establish long euro/dollar positions above $1.2750 because a clear breach of $1.2730 would suggest the downtrend had been broken.
The euro could reach $1.2767 as the target off an A-B-C wave sequence starting from the euro's four-year low at $1.1876, with the C-wave starting at $1.2152. The $1.2780 area is a 50 percent retracement of its fall from mid-April to the June low.
"There is still a risk that euro shorts get covered and the bounce extends but it is no more than that: a short-term bounce," Adam Cole, global head of foreign exchange strategy at RBC Capital Markets, said.
That view was reflected in the gap between 1-month risk reversals EUR1MRR=ICAP, which have fallen nearly 55 basis points to 0.85/1.35 percent since end-June, and 1-year risk reversals EUR1YRR=ICAP, which have shed 25 basis points.
This indicates market players are willing to pay a higher premium to buy the right to sell the euro down the line.
CANADIAN DOLLAR UP ON JOBS
Canada added 93,200 jobs in June, building on previous gains and coming close to recovering all the jobs lost during its recession. [nSCL9IE63J] The U.S. dollar fell 1 percent to C$1.0326 CAD=D4 on the data, its lowest since late June.
The dollar index .DXY fell 0.1 percent to 83.744 following the Canadian numbers, but off from a two-month low. Canada's figures mirror strong jobs data from Australia earlier this week that drove the Australian dollar up more than 4 percent.
Strong data has boosted hopes of a firmer economic recovery and raised pressure on the low-yielding yen JPY= as investors cut long positions and shifted into high-beta currencies like the Aussie AUD=D4 and New Zealand dollars NZD=D4.
The euro touched a two-week high of 112.69 yen EURJPY=R on EBS after jumping more than 1 percent on Thursday but pared those gains and was flat at 112.23 euro.
The dollar gained 0.2 percent to 88.56 yen JPY=. It has moved away from a seven-month low of 86.96 yen struck on July 1. (Additional reporting by Tamawa Desai and Naomi Tajitsu)