FOREX-Euro hits 8-week high, debt fears fade a bit

* Euro hits 8-wk high vs dollar, but uncertainty remains

* Market growing less anxious about debt crisis

* Obama presses Hu to let the yuan rise more

(Recasts, updates prices, adds quotes, detail, byline

By Steven C. Johnson

NEW YORK, Jan 19 (Reuters) - The euro hit an eight-week high above $1.35 on Wednesday, boosted by increased confidence in Europe's ability to defuse its debt crisis, and could extend gains if it holds ground above important technical levels.

Traders said Asian sovereigns were again big euro buyers, and that forced enough short-covering to help it outperform the dollar for the seventh session in the last eight.

The Chinese yuan was little changed on the spot market, suggesting traders don't expect much more appreciation against the dollar. [ID:nTOE70I06V]. President Barack Obama pressed his Chinese counterpart, Hu Jintao, to let the currency rise more quickly during Hu's U.S. state visit.[ID:nTOE70H05K]

But the focus remained the euro, which hit a four-month low beneath $1.30 last week as markets worried that a debt crisis that claimed Greece and Ireland would spread.

Solid bond auctions in Spain and Portugal have boosted spirits, however, and talk that German officials were drafting contingency plans in case Greece defaults suggested they were working to prevent the crisis from worsening. [nLDE70I158]

"There is a growing sense of optimism that European leaders are finally getting their act together and working in a unified manner," said Samarjit Shankar, managing director of global foreign exchange strategy at BNY Mellon in Boston.

Shankar said net buying among major currencies Wednesday was strongest in the euro and said momentum could make a run toward $1.36-37 possible in coming sessions.

But Citigroup chief technical strategist Tom Fitzpatrick said a run at its next upside target of $1.3571,the 50 percent retracement of its November-to-January slide, would probably require the currency to close above $1.35 on Wednesday.

After hitting an eight-week high of $1.3538 overnight, the euro retreated to $1.3466 by afternoon in New York, still up 0.7 percent.

The dollar fell 0.7 percent to 82.04 yen <JPY=>, with BNY Mellon citing renewed Japanese equities inflows helping the currency, and shed 0.9 percent to 0.9553 Swiss francs <CHF=>.

Comments from the European Central Bank last week, which highlighted near-term inflation pressures, have also helped the euro by sparking talk of an earlier-than-forecast rate rise.

Euribor rates rose further, reflecting higher interest rate expectations. [ID:nLDE70I0US]

SOME UNCERTAINTY REMAINS

The euro pared gains against the dollar after IFR reported a German government adviser was quoted as saying Greece may not be able to repay its foreign debts.[ID:nIFRcdcM7P]

It also slipped after EU Economic and Monetary Affairs Commissioner Ollie Rehn said increasing the 440-euro limit of a euro zone rescue fund was not a priority and that the fund's efficiency needed work. [ID:nHEL009988]

Despite recent euro gains, "we could still relapse toward $1.30 by the end of the quarter," Shankar said. "Right now, portfolio managers are testing the waters."

Among the euro buyers have been sovereign accounts, traders said. Also, Russia joined China and Japan this week in expressing interest in bonds from the European rescue fund.

China has said it wants to move away from a global system dominated by the dollar. If it were to let the yuan to rise more rapidly against the U.S. currency, it would not need to buy as many U.S. Treasuries, which could put upward pressure on U.S. yields. China is the largest foreign U.S. creditor.

For more, see [ID:nN12269574]

"I think the framework that is useful for analyzing what's going on with the yuan is one where China pursues a strategy of gradual appreciation and the U.S. uses these political events to increase the pressure slightly," said Jens Nordvig, global head of G10 strategy at Nomura Securities International.

The yuan is up some 3.7 percent against the dollar since mid-2010.

(Additional reporting by Julie Haviv, Wanfeng Zhou and Gertrude Chavez-Dreyfuss in New York; editing by Diane Craft)