TOKYO, June 17 (Reuters) – The euro slipped from its two-week highs versus the dollar on Thursday as its short-covering rally ran out of steam and as worries about Spain’s public finances and banking system stopped it overcoming key resistance.
After failing to break above $1.2350-55 twice in the past 48 hours, the euro EUR= is at risk of retreat to around $1.2175, a 38.2 percent retracement of its rebound from a four-year low below $1.19 set last week.
“Players think the euro’s rise led by short-covering has come to a near-term end,” said an FX trader at a major Japanese brokerage.
“We hear overseas investors with real money, such as pension funds, are picking up the euro,” the trader said. “But besides them, there are few aggressive buyers of the euro, leaving the single currency vulnerable.”
Traders said the euro was likely to see selling into rallies as tolerance for risk subsided on a revival in concerns about euro zone fiscal problems.
“Some people want to reduce risk positions on worries about Spain,” said Daisuke Karakama, market economist at Mizuho Corporate Bank.
But the euro’s fall has not been as sharp as in May when worries about the impact of Europe’s fiscal problems drove it down rapidly, and this indicated that although some shorts have been covered, the market is still short euro longer term, Karakama said.
“The euro would have been sold much more hysterically if it were a month ago,” he said.
It slipped 0.3 percent from late U.S. levels to $1.2268. It is more than half a percent below the two-week high of $1.2354 hit on Wednesday but still up about 3 percent from the four-year low of $1.1876.
The market will be watching a Spanish bond auction later in the day after the spread of Spanish government bond yields over benchmark Bunds soared to a euro lifetime high on Wednesday. [ID:nLDE65F23Y]
“In the past few sessions, rises in the credit spreads of euro zone countries have not led to euro selling as much as before. But unless conditions in Europe improve, correlation (between the euro and European bond spreads) will return,” said Junya Tanase, senior strategist at JPMorgan Chase Bank.
The European Union holds a summit on Thursday to discuss ways to strengthen budget discipline and economic policy coordination.
The EU and IMF on Wednesday denied 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 result of bank stress tests which the Spanish central bank said would be published soon. [ID:nLDE65F1X2] [ID:nLDE65F1AL]
The euro also fell against sterling, the yen and the Swiss franc. It shed 0.7 percent to 112.01 yen EURJPY=R as Japanese banks sold. That helped push the dollar down 0.5 percent to 91.30 yen JPY=.
The dollar index .DXY =USD was up 0.3 percent at 86.37, well above support near 85.85 which is the index’s May 28 low.
The Australian dollar AUD=D4 eased from one-month highs of $0.8674. It was trading at $0.8593, down 0.4 percent, with some players looking to sell into rallies after it failed to hold gains above $0.8650.
The dollar was little changed on the day against the Swiss franc CHF= at 1.1307 francs ahead of a Swiss National Bank 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. [ID:nLDE65E2DB] (Additional reporting by Reuters FX analyst Krishna Kumar in Sydney and Rika Otsuka in Tokyo; Editing by Joseph Radford)