* Euro climbs on speculation of crisis-fighting steps * Potential for short squeeze higher towards $1.2390 * Disappointment could hit commodity currencies hard By Nia Williams LONDON, Aug 2 (Reuters) - The euro inched up against the dollar on Thursday as many investors speculated that the European Central Bank will announce new steps later in the session to tackle the debt crisis and boost appetite for riskier currencies. Analysts said investors were waiting to see whether ECB President Mario Draghi delivers strong crisis-fighting measures after his vow last week to protect the euro. Those expectations have been tempered since Draghi spoke by the German central bank repeatedly stating its opposition to more ECB bond buying. Draghi's comments have fuelled heavy speculation that the ECB could reactivate its SMP bond buying programme to bring down high borrowing costs in Italy and Spain. Such a move could help the euro test last week's high of $1.2390 as investors who earlier bet against the single currency are squeezed out of short positions. But if the central bank falls short of expectations the euro could slide, while some strategists said other perceived riskier currencies would be hit harder still. "We have seen some long risk positions built up on the back of expectations central banks in general will do more. There's scope for disappointment on that front although we're more likely to see it in the Aussie and Canadian dollar rather than the euro," said Michael Sneyd, FX strategist at BNP Paribas. "Short-term positioning indicates there's scope for a short squeeze higher in the euro if Draghi does not disappoint." The euro rose 0.3 percent against the dollar to $1.2259, clear of last week's two-year low of $1.2042. It also climbed 0.3 percent against the Japanese yen. Sneyd said Draghi was most likely to give a strong verbal commitment that the ECB stood ready to reactivate the SMP. Another rate cut or injection of cheap funding into the banking system (LTRO) was less likely given the central bank cut the deposit and interest rate only last month. Many analysts said trade in the euro would remain muted ahead of the 1145 GMT rate decision and 1230 GMT news conference, given the risk of a surprise policy move. "It's really difficult to see how they are going to live up to the market's expectations," said Mitul Kotecha, head of global FX strategy for Credit Agricole in Hong Kong. A Munich-based daily said Draghi was planning concerted action using both the ECB and the future euro European Stability Mechanism (ESM) to purchase sovereign debt from Spain or Italy in order to help push down borrowing rates. The newspaper added, however, that a final decision is not expected until after Sept. 12, after the German Constitutional Court rules on the ESM. The euro could come under pressure if Spanish borrowing costs rise sharply at an auction of 2 to 3 billion euros of debt maturing in 2014, 2016 and 2022. FED HOLDS STEADY The dollar held on to gains against major currencies after the Federal Reserve refrained from offering new stimulus, a move that was largely expected. The greenback was steady against the yen at 78.44 yen , staying above a two-month low of 77.90 yen hit on trading platform EBS on Wednesday. The dollar index, which tracks the dollar's value against a basket of major currencies eased 0.1 percent to 82.975. Higher-yielding commodity currencies like the Australian, New Zealand and Canadian dollars looked set to take direction from the ECB. Measures to support peripheral euro zone bond markets would boost investor appetite to take on risk and could help those currencies climb higher, while disappointment on the ECB may knock them heavily. The Australian dollar rose 0.2 percent to US$1.480, close to Wednesday's four-month high of US$1.0543. The Canadian dollar traded steady at C$1.0050, near the previous day's 2-1/2 month peak of C$1.0003

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