* Euro retreats from highs as investors take profit
* Markets cautious ahead of ECB meeting Thursday
* Yen selling eases, while AUD awaits RBA rate decision
By Ian Chua
SYDNEY, Feb 5 A week-old rally in the euro came to a halt on Tuesday as investors took profits on its stellar gains in the run-up to this week's European Central Bank policy meeting, just as selling pressure on the yen eased off slightly.
The euro was last at $1.3504, having fallen nearly 1 percent to be well off a 14-month high of $1.3711 set Friday. Immediate support is seen around $1.3484, the peak for 2012, followed by $1.3255, an area that provided a floor recently.
Against the yen, it dipped to 124.29, recoiling from a 2-1/2 year high of 126.97. The single currency slid more than 1 percent on the Australian dollar, suffering its biggest one-day decline since Nov. 2011. It fetched A$1.2947, down from a 14-month high of A$1.3189 set recently.
In January alone, the euro has risen nearly 9 percent on the yen, and about 3 percent against both the greenback and the Aussie dollar.
A selloff in Italian and Spanish government bonds on Monday amid growing political uncertainty in the two countries appeared to have provided an excuse for investors to book profits in the euro.
Traders said euro bulls were already starting to turn cautious in the lead-up to Thursday's European Central Bank (ECB) policy meeting.
"The recent drawdown in the ECB's balance sheet as well as the recent rapid appreciation by the euro, has stoked not only liquidity concerns, but also concerns that euro zone exporters' competitiveness may be eroding at a very fragile time," said Christopher Vecchio, currency analyst at DailyFX.
Vecchio was referring to a recent repayment of a whopping 137 billion euros of ECB emergency loans, which slashed the amount of cash floating in the euro zone banking system.
"Accordingly, a more neutral tone is expected this week, if only to offset the prior hawkish tone set forth by the ECB at the January meeting."
The euro's decline saw the dollar index pop up to 79.612, rebounding from a 4-1/2 month trough plumbed Friday and easing an immediate threat of further declines in the greenback.
The dollar, however, took a bit of a breather against the embattled yen. It was last at 92.06, having touched a fresh 2-1/2 year high near 93.19.
Traders suspect the yen's downtrend will remain intact with the Bank of Japan under the most pressure among major central banks to ease aggressively.
In contrast, the Reserve Bank of Australia is likely to leave its cash rate steady at 3.0 percent on Tuesday, having just cut in December. It will announce its decision at 0330 GMT.
Markets have priced in a mere 20 percent chance of a rate cut, putting the Australian dollar vulnerable to any surprise move by the central bank.
The Aussie stood at $1.0435, holding well within its prevailing $1.0360/0480 range.