FOREX-Euro rises to 2-mth high, nears key resistance

* Euro rises to 2-mth high, near key retracement at $1.3576

* Improving confidence in euro zone boosts currency

* Spain has plans for savings banks, Portugal vulnerable

(Releads, adds quotes, detail, previous TOKYO) By Neal Armstrong

LONDON, Jan 21 (Reuters) - The euro rose to a two-month high versus the dollar on Friday, helped by Asian demand and improving confidence in the euro zone, but its rally was on shaky ground as it approached key technical resistance.

Successful bond sales from highly indebted countries, including Portugal and Spain, and expectations of a strengthened euro zone rescue fund were lending the euro support, together with a more hawkish outlook from the European Central Bank but debt problems were still in the background.

"This reaction seems overdone as it's highly unlikely the ECB will raise rates soon and there's been nothing concrete on the rescue fund," said Raghav Subbarao, currency strategist at Barclays Capital.

"We think Portugal will have to be bailed out eventually. After that the euro can rise further as Spain we believe is solvent, but the euro rally is not sustainable here," he added.

Spain is planning to force its regional savings banks to become conventional banks and seek stock market listings, a source familiar with the matter told Reuters, [ID:nLDE70K0A4]

The debt-laden savings banks and a possibly expensive rescue are seen as major risks for Spain's government as it aggressively cuts its budget deficit.

The single currency rose to a two-month high of $1.3566, given a further boost by the release of a stronger-than-expected German Ifo survey. [ID:nBAE003872] It was last at $1.3540, up 0.5 percent on the day.

Traders said major Asian sovereign accounts were again active in driving the euro higher, while focus was on a key technical level at $1.3576, the 50 percent retracement of the euro's fall from November to January.

"To diminish the risk of an upside break-out towards $1.3700 we would need to see a move below this week's lows around $1.3240 as well as the 55-week moving average (at $1.3271)," said Michael Hewson, analyst at CMC Markets.

The euro rose to five-week highs versus around 112.20 yen <EURJPY=R>, making a technical break above a closely watched Japanese indicator, the Ichimoku cloud, in the 112 yen area. A daily close above the cloud would give the euro potential to rally further.

DOLLAR INDEX NEAR TWO-MONTH LOW

The euro's rally helped to knock the dollar index down 0.4 percent to 78.493 <.DXY>, not far from a two-month low of 78.303 hit on Wednesday, while it slipped 0.3 percent to 82.75 yen <JPY=>.

A bounce in Chinese equities also helped to support risk appetite. Shanghai shares rose 1.4 percent <.SSEC>, regaining some ground after having slid nearly 3 percent the day before as latest Chinese economic data pointed to further policy tightening.

The Australian dollar was 0.1 percent lower on the day at $0.9865 <AUD=D4> after coming under pressure on Thursday when strong Chinese data renewed worries the world's second biggest economy could take a tougher stance on fighting inflation this year, and ultimately slow its demand for commodities.

(Additional reporting by Tokyo forex team, editing by Toby Chopra)