* Euro eases vs dollar, hits 3-1/2 year low vs sterling
* Losses vs dollar tempered before Fed chief’s testimony
* Dollar falls to near four-week low vs yen
* Debt worries to keep euro under pressure
By Michael Szabo
LONDON, July 16 (Reuters) - The euro weakened on Monday with investors concerned about how long it could take to mobilise bailout funds for troubled euro zone states though falls against the dollar were tempered before testimony this week by U.S. Federal Reserve chief Ben Bernanke.
The euro fell to a 3-1/2 year low against sterling, a six-week low against the yen and hovered close to a two-year low against the dollar.
Germany’s Constitutional Court said on Monday it would not rule until September 12 on whether the euro zone’s bailout fund, the European Stability Mechanism (ESM), and planned changes to the region’s budget rules are compatible with German law.
“This adds to the uncertainty about the ability of the euro zone officials to respond adequately to any potential further deterioration of the debt crisis. This is reflected in today’s market price action in euro crosses,” said Valentin Marinov, Director of FX Strategy at CitiFX.
A report suggesting a change in the European Central Bank’s stance on how some bondholders could be treated under Spain’s bank bailout added to pressure on the common currency.
The euro slipped 0.4 percent against the dollar to $1.2190, slightly above a two-year low of $1.2166 hit last week.
It fell to 78.41 pence against sterling, its weakest since late 2008, and to 96.20 yen, its lowest since June 1, and hit a record low against the Canadian dollar.
Investors have stepped up sales of the euro in favour of perceived safer currencies, disheartened by the lack of progress towards solving the bloc’s spiralling fiscal crisis.
A report in the Wall Street Journal said European Central Bank President Mario Draghi advocated imposing losses on holders of senior bonds issued by the worst hit Spanish savings banks.
The ECB declined to comment on the report, which said finance ministers rejected the advice due to concerns financial markets would react badly to such a decision.
“The euro is likely to remain on the defensive ... If this report gains credibility that would be another reason to play the euro from the short side,” said Jeremy Stretch, currency strategist at CIBC.
Analysts said a vote on Thursday in the German parliament on Spanish bank aid was a further reason for caution.
German Chancellor Angela Merkel said on Sunday she was confident of backing from a majority of lawmakers, but analysts said unanimous support from her party was far from certain.
Spanish and Italian bond yields remained elevated as market confidence that the countries can finance their debts while reining in deficits ebbed.
But dollar gains could be limited if Fed Chairman Bernanke hints in testimony on Tuesday and Wednesday at the possibility of more quantitative easing to boost the U.S. economy.
“Euro/dollar could retest the lows, but pronounced downside from here may be difficult to sustain, especially ahead of Bernanke’s testimony,” CitiFX’s Marinov said.
“The balance of relative euro/dollar risks may be shifting ... as investors who were willing to ignore the growing dollar negatives could start paying closer attention to them after the Bernanke’s testimony.”
However, analysts said the dollar would see a relief rally if Bernanke did not hint at more QE.
The dollar fell to a near four-week low against the Japanese yen of 78.91 yen, dropping below chart support at its 200-day moving average around 79.04 yen.
The Fed last month expanded efforts to keep long-term interest rates low by saying it would buy an additional $267 billion in long-dated bonds while selling short-term securities, but it held off from a third round of outright bond purchases.