* Aussie fails to rally with investors cautious; drags NZ$ * Charts flag possible near-term rise * But analysts expect Aussie to drop further in coming weeks SYDNEY/WELLINGTON, May 26 (Reuters) - The Australian and New Zealand dollars bounced off 10-month lows on Wednesday but failed to rally smartly as unease over Europe and the Korean peninsula meant investors were ever ready to sell more of risky currencies. The Australian dollar traded at $0.8234, after a bout of short-covering helped it to jump in late New York trade from lows of $0.8067. But it failed to rise above the day's high of $0.8302, with Japanese investors seen selling the Aussie around $0.8260 and 74.70 yen . Greg Gibbs, an analyst at RBS, said Japanese margin traders were not a part of the massive selling in the Aussie in the past week when the currency was hammered, but that could change. "Japanese margin traders have not yet been a big factor in driving a stop-loss run in Aussie, although they are now in the process of paring longs," Gibbs said. "They are a factor that suggests the Aussie may be heavy in the near term." Expectations for the Aussie to drop further in coming days were echoed across banks. Westpac advised clients to sell the Aussie if it rises to $0.8350, and to only cease selling if it hits $0.8400. In the near term, charts showed the Aussie may test recent highs of $0.8373. The hourly chart showed the Aussie may have formed a double bottom after bouncing from the low of $0.8066 overnight, which corresponded to the May 20 low of $0.8071. Still, over coming weeks, funds appeared to be leaning towards bets for the Aussie to reverse any short-term bounce and fall towards $0.7700, a major technical level. Worries that Europe's sovereign debt crisis may fan out into a banking crisis, and festering tensions between North and South Koreas gave investors yet more reasons to believe it was unwise to buy risky currencies for now. The kiwi also struggled to sustain any move higher, settling around $0.6655/60 little changed from the previous day's late local level. It had managed a brief foray above $0.6700, which gave way under selling from Asian interests. However, it managed to stay well off a low of $0.6561 hit in offshore trade, its lowest since July 31, 2009. "Overall sentiment for the kiwi is underlyingly supportive, but it is too tough to break back higher without support from the Aussie and the euro, which are rather weak," said ANZ Bank senior dealer Alex Sinton. In the absence of any local data, the kiwi is set to follow broader events and themes, particularly with equities. Kiwi's support is around $0.6625 and resistance at $0.6720. Any further weakness in equities and reduction of risk would likely see a retest of the $0.6561 low. Against the safe-haven yen, the kiwi was down just under 1 percent on the day at 60.00 yen, still holding above the ten-month low touched on Tuesday. Kiwi was flat around 0.5420 euro . NZ April monthly trade data is due on Thursday with expectations for a solid surplus for the month of NZ$455 million and the annual balance fractionally in deficit. [NZ/POLL] NZ bonds <0#NZBMK=> were largely flat, but there was a slight offered tone at the long end of the yield curve. NZ swaps yields were as much as three basis points lower.

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