May 30, 2012 / 8:28 AM / 5 years ago

FOREX-Euro falls to near 2-year low on Spain's debt woes

* Spanish banking problems keeps investors edgy

* Focus on rising Spanish debt yields and risk of bailout

* Dollar index on cusp of closing above 100-month MA

By Anirban Nag

LONDON, May 30 (Reuters) - The euro fell to it lowest in nearly two years against the dollar on Wednesday, as concerns about Spain's ailing banking sector and soaring borrowing costs drove investors and speculators to add to bearish bets against the common currency.

Worries that Spain may have to tap debt markets at a time when its borrowing costs are rising towards unsustainable levels, or even worse, seek an international bailout and recapitalise its banks were likely to keep the euro under pressure with many expecting it to drop towards $1.20.

The euro fell to $1.24383 on trading platform EBS, its lowest level since early July 2010, breaking past an option barrier at $1.2450 and stop-loss orders below that level. Another option barrier is reported at $1.2400.

The single currency was last down 0.4 percent from late U.S. trade on Tuesday at $1.2445. Against the yen, the euro was down 0.7 percent at 98.755 yen, having hit a four-month low of 98.678 yen earlier.

"The bailout risks for Spain are increasing and that should keep the euro under pressure," said Melinda Burgess, currency strategist, at RBS Global Banking. "Our short-term fair value model is showing the euro should be around $1.21 with the euro a sell against a broad range of currencies."

The latest drop in the euro comes as the 10-year Spanish government bond yield continued to inch towards 7 percent. That was the level when other peripheral euro zone countries had to seek an international bailout.

The sell-off in Spanish bonds has also kept risk premium over safe-haven German Bunds elevated at euro-era highs. All of which means the euro is firmly in the grip of bears with real money and institutional investors stepping up sales.

"The widening in the spread has been significant, and is weighing on the euro against both the dollar and the yen," said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.

The euro had gained some reprieve earlier in the week after Greece's pro-bailout parties regained an opinion poll lead ahead of elections on June 17, easing market fears of a messy Greece exit from the euro zone.

But the single currency's bounce proved short-lived as the market's focus shifted to Spain, and its failure to breach resistance near $1.2625 left the euro looking vulnerable.

A government source told Reuters on Tuesday that Spain would likely recapitalise Bankia, which asked for 19 billion euros on Friday, by issuing new debt and possibly drawing cash from the bank restructuring fund and Treasury reserves.

DOLLAR SOARING

Adding to the euro's woes, Egan-Jones Ratings cut Spain's credit rating yet again. Tuesday's move was the small firm's third downgrade of the country's sovereign debt in less than a month.

The euro's losses saw the safe-haven dollar and yen gain. The dollar has risen nearly 5 percent in May against a basket of major currencies. The dollar index is now at 82.688, above its 100-month moving average near 81.82.

A monthly close above that resistance may herald a shift in the longer-term trend of the dollar and reversing a multi-year drift lower.

"If the dollar does close above that 100-month moving average, that might just suggest a break of this long-term downtrend," said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong.

The yen has also done well this month. On Wednesday, the dollar fetched 79.30 yen, not far from a three-month low of 79.002 yen hit earlier in May.

The Australian dollar sagged after weaker-than-expected retail sales data underscored the case for interest rate cuts.

The Aussie dollar fell 0.8 percent to $0.9765, slipping back in the direction of a six-month low at $0.9690 hit last week.

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