Euro falls in London

The euro fell against the dollar on Thursday after reasonable demand at a Spanish bond sale failed to soothe concerns about the sustainability of the country's debt, with falls in the common currency tracking widening yield spreads. Spain's Treasury issued 2.5 billion euros in two- and 10-year bonds, at the top end of the targeted amount. Yields on the key 10-year bond were higher, however, due to worries Spain may miss budget deficit targets and fears about the health of its banking sector.
The euro dropped 0.3 percent to hit a session low of $1.3069, reversing gains after the Spanish auction when it climbed to $1.3166. Traders said they were inclined to sell into any euro rallies, with the rise in Spanish and Italian yields undermining any optimism from the auction. Market talk of a French downgrade also undermined sentiment towards the common currency.
The euro held above strong chart support at $1.30. But an escalation of concerns about Spain's high level of debt, at a time when the economy is faltering, would put the euro back under pressure, potentially taking it towards the 2012 low of $1.2624. "The market has come to realise that positive bond auctions are not Spain's salvation," said Neil Mellor, currency strategist at Bank of New York Mellon, adding it was only a matter of time before the euro broke below $1.30.
Many in the market said the euro would head lower in the medium term given the risks that budget and debt problems in Spain will worsen and uncertainty over the outcome of the French presidential election, which polls suggest will result in a leadership change. Traders cited talk of hedge funds betting the euro will fall to $1.25 soon after the French poll concludes early next month.
However, analysts said positioning indicators suggested market players were already very short of euros versus the dollar, which could limit short-term falls. The safe-haven Japanese yen fell, under pressure as equities gained and after Bank of Japan Governor Masaaki Shirakawa stressed the central bank's commitment to powerful monetary easing.
The dollar rose 0.5 percent to 81.70 yen, triggering reported stop loss buy orders around 81.60 yen, with traders earlier citing flows related to the launch of a large investment trust by a Japan investment bank. The euro was up 0.5 percent at 107.14 yen, although resistance came in around its 50-day moving average at 107.44 yen. The higher-yielding Australian dollar was steady against the US dollar at US $1.0356.