NEW YORK: The euro slipped to it lowest in more than two weeks against the dollar on Tuesday as Spanish bond yields rose and hopes faded that a European summit would make progress in resolving the region's debt crisis.
But further losses could be limited ahead of the meeting, which takes place on Thursday and Friday, as expectations for it were already low, analysts say. An unexpected positive outcome could spur a short-squeeze in the euro although traders are likely to sell into any bounce.
The prospect of a quick move toward a banking union or issuance of common euro zone bonds looked increasingly unlikely, with German Chancellor Angela Merkel describing moves to share debt liability as "counter productive".
Merkel was also quoted as telling a meeting of one of the parties in her coalition on Tuesday that Europe would not have shared total debt liability "as long as I live".
"The euro is going to trend lower, but I don't think you're going to see any large moves ahead of the summit," said John Doyle, senior strategist at Tempus Consulting in Washington.
"I don't think, realistically, that anyone is expecting a magic bullet to come out of this meeting and to fix all the underlying problems in Europe."
The euro fell as low as $1.2440 on Reuters data, the weakest since June 8, after earlier reported sovereign demand faded. It last traded at $1.2485, down 0.2 percent. The next downside target lies near the June 1 two-year low of $1.2286.
"There is increasing pessimism as to whether any degree of substantive action will be agreed at the summit. The most encouraging thing is that no one has any expectations, but that's as good as it can get," said Jeremy Stretch, head of currency strategy at CIBC in London.
"If there is any positive reaction I suspect it will be a case that the devil is in the detail and any rallies will be sold into." He added he expected the euro to drop towards $1.23 over the coming weeks.
The euro zone's debt problems showed no signs of abating, with Cyprus becoming the fifth euro zone country to request help as its banks have been hit hard by exposure to debt-crippled Greece.
Spain's short-term borrowing costs nearly tripled at an auction on Tuesday, a day after the country formally requested a European bank rescue and Moody's cut the ratings of most Spanish lenders. Italy also sold debt, with yields rising to the highest since December.
And Italy offered up to 2 billion euros on Tuesday to plug a capital gap in the bank Monte dei Paschi di Siena, the second time in three years the cash-strapped state has had to bail out the world's oldest bank.
Against the yen, the euro slipped 0.4 percent to 99.21 after hitting 98.71, also a two-week low. The euro also dropped against sterling to its lowest since the end of May.
UBS said skepticism about the euro was reflected in the bank's latest flow monitor, which showed their clients continued to add to short euro positions last week, while overseas investors offloaded a net $2 billion worth of euro-denominated equities, the most since July 2008.
SHOWDOWN IN TOKYO
The risk of disappointment from another euro zone summit and risk aversion supported the Japanese yen and helped it pull away from a near two-month low against the dollar.
The dollar fell 0.3 percent to 79.45 yen, off an eight week high of 80.59 hit on Reuters data on Monday.
But analysts said the yen could struggle as political uncertainty gripped Japan. The country's lower house approved a plan to double the sales tax to help curb the snowballing national debt, although the vote split the ruling Democratic Party.
"The threat of heightened political uncertainty may weigh upon the yen in the near-term although it is more likely to be offset by ongoing negative developments in Europe which are still fuelling safe haven demand for the yen," Lee Hardman, currency economist at Bank of Tokyo Mitsubishi in London wrote in a note.
Some market players think the yen may come under pressure if a large number of ruling party lawmakers revolt against Prime Minister Yoshihiko Noda's tax hike plan, which could force him to call an early election.
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