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Euro slips on Spain worries ahead of auction

Source: Reuters - Thu 17th Jun 2010

The euro slipped against the dollar on Thursday as worries about Spain's public finances and banking system hit sentiment, with results of a Spanish bond auction awaited.

The market will be watching the auction of up to 3.5 billion euros of 10- and 30-year bonds later in the day after the spread of Spanish government bond yields over benchmark Bunds soared to a euro lifetime high on Wednesday.

"A failure to cover these auctions could see some of the risk appetite that has returned this week dissipate very quickly" said Michael Hewson, currency analyst at CMC Markets.

The European Union and International Monetary Fund denied on Wednesday a report they and the U.S. Treasury were drawing up a safety net for Spain. But worries about Spanish banks put pressure on yields and the market will be looking for the results of bank stress tests which the Spanish central bank said would be published soon.

The European Union holds a summit on Thursday to discuss ways to strengthen budget discipline and economic policy coordination.

At 0655 GMT, the euro was trading down 0.4 percent versus the dollar at $1.2262, having risen to a two-week high on Wednesday on increased risk tolerance and, in particular, demand from sovereign accounts.

"Despite the relentless demand the market has seen from some quarters, the euro outlook is bleak as the market continues to focus on Spain" a spot trader at a U.S. bank in London said.

Traders said there was good demand in the $1.2250 area with stop-losses lurking below, while technical analysts noted support at $1.2175, the 38.2 percent retracement of the rebound from a four-year low below $1.19 set last week.

The euro also fell 0.5 percent to 111.95 yen, while the dollar was down 0.1 percent at 91.30 yen.

The dollar index .DXY was up 0.4 percent at 86.404, well above support near 85.85 which is the index's May 28 low.

The dollar was little changed on the day against the Swiss franc at 1.1307 francs ahead of a Swiss National Bank policy meeting.

The SNB is expected to keep interest rates low but may announce measures to drain excess money from the economy after flooding the market with francs since 2009 to keep the currency from appreciating too rapidly.

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