NEW YORK: The euro fell for a second straight session against the dollar on Wednesday, as euzo zone debt worries mounted ahead of bond sale on Thursday in Spain, seen as testing test Madrid's capacity to grapple with financial and budgetary pressures.
Spain is the fourth largest euro zone economy and the fear in the market is that its collapse could have a domino effect on other healthier countries in the region.
The euro was further pressured by gains in sterling, which posted the biggest gains so far among the major currencies. The British pound rallied after minutes showed the Bank of England expressed concern that high inflation could persist into the medium term. One BoE policymaker, for instance, dropped his long-standing call for more stimulus.
The fall in Spanish shares also weighed on the euro. Some strategists said comments from European Central Bank policymaker Jens Weidmann that countries should not expect the central bank to tackle rising debt yields by buying government bonds prompted the weakness in stocks.
"Investors are growing more cautious on the eve of a key Spanish bond auction on Thursday. That is seen as the taller hurdle compared to the positive outcome of the bill auction in Madrid yesterday," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
Spain will auction up to 2.5 billion euros of 2014 and 2022 bonds on Thursday. Any evidence of poor demand and high yields at the auction would aggravate concerns about Spain's fragile fiscal position.
Spain projects its economy will contract 1.7 percent this year as it compresses domestic demand to wrestle its budget deficit down to 5.3 percent of gross domestic product from 8.5 percent in 2011.
Data showing Spanish banks' bad loans rose to their highest level since 1994 also spooked investors.. Banks are facing a new wave of loan defaults and analysts say some may not survive as the government implements sweeping budget cuts that add to Spanish households' problems with repaying debt.
In early New York trading, the euro dropped 0.4 percent against the dollar to $1.3072, within sight of a two-month low of $1.2994 hit briefly last week.
The euro's intra-day bias against the dollar remains neutral for now, analysts at ActionForex.com said, given that it has stayed within the $1.2994-$1.3212. On the downside, ActionForex said a fall below $1.2994 will extend the whole decline from the $1.3486 multi-month high hit in Feburary to the $1.2625 low struck in mid-January.
On the upside, however, a break of $1.3212 suggests that the choppy decline from $1.3486 is merely a correction and is now complete. ActionForex said the bias will then shift back to the upside for $1.3385 and an eventual re-test of that $1.3486 peak.
The euro has struggled to rise above $1.32 since early April. CitiFX Wire said in a note that its traders were looking to buy the range-bound currency on dips.
Traders also cited selling by Swiss investors after French President Nicholas Sarkozy said a strong euro hurt exporters and the euro's exchange rate should be up for discussion with the ECB.
The euro fell 0.7 percent against the pound to 81.67 pence, its lowest level in 19 months and below reported options barriers at 82 pence.
Against the Swiss franc, the euro was up slightly at 1.2023 francs. Market participants were on the alert for any action from the Swiss National Bank to weaken the franc.
Foreign exchange traders earlier cited talk that the SNB was checking forward rates in the Swiss franc on Wednesday, which some saw as a signal that policymakers are determined to enforce their cap on the franc at 1.20 per euro.
Meanwhile, the Swedish crown rose to a two-week high against the euro of 8.8350 crowns after the Riksbank left rates on hold and said it expected to keep them there for at least a year.
YEN FALTERS
The dollar rose 0.6 percent against the yen to 81.32 yen. The euro traded up 0.3 percent on the day at 106.35 yen, holding above Monday's low of 104.62 yen.
The yen weakened further after Bank of Japan deputy governor Kiyohiko Nishimura said on Wednesday that the central bank was ready to ease policy further if necessary to help Japan's economy recover.
In recent weeks there has been a growing perception in the market that the US Federal Reserve may not hint at further easing at its April 24-25 meeting, in contrast to expectations the Bank of Japan will take fresh easing steps on April 27.
Some analysts said the market was pricing in further easing too aggressively, opening the door to a rebound in the yen.
"Even if they get 5 trillion yen extra in asset purchases it probably won't be enough because the market is expecting so much. We recommend holding dollar/yen shorts going into the meeting," said Geoff Kendrick, currency strategist at Nomura in London.
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