* Euro broadly higher, short squeeze continues * Intervention fears heighten risk aversion * Australian dollar jumps but still sharply down on week (Recasts, adds comment, updates prices) By Nick Olivari NEW YORK, May 21 (Reuters) - The euro rose on Friday, heading for its first weekly gain versus the U.S. dollar in six weeks, as investors who had bet the currency would fall further bought it to prevent losses in case of currency intervention. Investors were jittery about holding significant positions in the euro and other currencies given some market-moving announcements have been made on weekends this month. The Australian dollar, down 6.6 percent on the week against the U.S. dollar, jumped on speculation Australia's central bank may intervene to support the currency. A high-yielding currency seen as a measure of global economic risk, the Aussie was set to suffer its biggest weekly drop since October 2008. Investors were watching a task force of European finance ministers meeting in Brussels on Friday. So far ministers look set to support a proposal for tougher sanctions against EU rule breakers. [ID:nLDE64K17F]. "These are still relatively illiquid market conditions with real money pushed to the sidelines," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York. "The market is controlled by speculators and they can push it around a fair bit." Worries about the economic impact of the euro zone debt crisis drove the single currency to a four-year low versus the U.S. dollar this week. The stampede out of the euro pushed net short positions in the single currency to a record high last week, with the current week's speculative positions on the euro to be released late on Friday. The euro has fallen roughly 5.5 percent against the dollar this month. Its steep decline has cranked up speculation European officials may be concerned about its level. It got a boost on Friday when European Central Bank President Jean-Claude Trichet said the euro was not in danger and was a credible currency. [ID:nWLA4690] Eurogroup Chairman Jean-Claude Juncker said on Thursday he did not see the need to take immediate action on the euro's decline. [ID:nTOE64I038] On Friday, the euro EUR= EUR=EBS climbed as high as $1.2673 on electronic trading platform EBS in early trade. It last traded at $1.2565, up 0.8 percent on Reuters data. It tumbled as low as $1.2143 earlier this week after Germany banned naked short selling in some securities, fuelling speculation about other possible market regulations. The euro is poised to end the week roughly 1.7 percent higher against the dollar, following five weeks of losses. AUSSIE GAINS Analysts said heightened fears about risk had prompted a rush to square positions -- long and short -- in currencies which are high-risk or less liquid. "Risk aversion has risen so rapidly that in order to protect their books, investors are just closing positions and repatriating capital," said Carl Hammer, currency strategist at SEB in Stockholm, adding: "It's a snowball effect." This flight to safety soaked up liquidity, resulting in choppy trade and aggravated currency movements. Against the Swiss franc, the euro EURCHF= traded 0.5 percent higher at 1.4432, having recovered sharply from a slide to an all-time low of 1.3995 francs earlier in the week. The Australian dollar AUD=D4 rose 1.7 percent against the U.S. dollar to $0.8267, pulling back from a low which was its weakest since July 2009. The Australian dollar was up 3.5 percent against the yen AUDJPY=R, after touching its lowest since July, 2009 earlier in the session, though still down around 9 percent for the week. "The aussie/yen is a good proxy for the risk trade and the yen has done well on the move away from risk in Europe," said David Kupersmith, head trader at Third Wave Global Investors, a global macro hedge fund in Greenwich, Connecticut. "It has nothing to do with the economic situation in Australia or Japan though there are signs Australia is slowing down." Kupersmith described his present currency position as light with no position in the euro because "there is so much political risk in trading it." He does have a long position in the Canadian dollar. The U.S. dollar fell 0.8 percent to C$1.0613 CAD=. Germany's lower house of parliament approved a bill to allow Berlin to contribute to the European rescue aid for Greece and other euro zone nations plagued by debt problems. [ID:nBAT005487] Merkel said on Friday the vote sends a strong signal on "European stability culture" [ID:nBEB004462]. (Additional reporting by Naomi Tajitsu in London) (Reporting by Nick Olivari; Editing by Andrew Hay)

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