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Forex-Euro holds near two-year lows, focus shifts to Spain

* Euro near last week’s lows, just below $1.25

* Watch for Spanish government bond yields to hit 7%

* Doubts grow over Madrid’s ability to prop up troubled banks on their own

* Euro short-covering likely subdued ahead of Irish referendum (updated levels)

Hideyuki Sano

TOKYO, May 29 (Reuters) – The euro wobbled near two-year lows against the dollar on Tuesday, as concerns about the cost of propping up Spain’s banking system pushed up its debt yields, offsetting a small easing of worries about Greece.

Spain’s 10-year bond yield rose to around 6.5%, sending its risk premium over Germany’s bunds to a euro-era high of 515 basis points, raising concerns that the euro zone’s fourth-largest economy could fall victim to the debt crisis concerns. .

“While the pessimism over Greece has receded, concerns about Spain have intensified and the market is watching whether Spanish bond yields will hit the 7 percent mark,” said Masafumi Yamamoto, chief currency strategist at Barclays in Tokyo.

The 7% yield on 10-year government bonds in euro zone countries is seen as critical, as all three countries that requested bailouts did so shortly after their bond yields rose above that level.

The euro traded at $1.2535, near last week’s two-year low of $1.2495, having failed for three days to clear resistance near support at $1.2625.

The euro gave up most of Monday’s gains after polls in Greece showed more support for bailout parties ahead of a June 17 general election. That eased fears that Greece could exit the euro zone and could have knock-on effects elsewhere. indebted country.

The currency is currently supported by bids just below $1.25, traders said, although there are more stops around $1.2450.

Against the yen, it was at 99.64 yen, close to a four-month low of 99.37 hit last week.


Many traders expect the euro to fall further as they worry that Spanish banks are struggling with a bursting property bubble, which could put further pressure on Madrid’s efforts to rein in debt.

“Markets seem to be uneasy about Spain, weeks after the government pumped 4.5 billion euros into the bank and Bankia asked for a 19 billion-euro bailout,” said Katsunori Kitakura, deputy general manager of market making at Sumitomo Mitsui Trust Bank. Trust.”, referring to the country’s fourth-largest bank.

Prime Minister Mariano Rajoy again on Monday ruled out seeking outside aid to revive Spain’s banking sector, even as investors doubted that would be feasible.

“The market thinks that without outside help, Spain will be cornered,” Kitakura added.

Any buying in the euro is also likely to be capped ahead of Thursday’s Irish referendum on a new European fiscal treaty, although the market is cautiously optimistic that the Irish will support the treaty amid fears that a “no” vote could add fuel to the fire.

While the treaty only requires ratification by 12 of the 17 euro zone countries, a rejection by Ireland – the only country to hold a referendum on the deal – would damage Europe’s strategy to overcome the crisis.

Risk aversion helped support the yen. The dollar was not far from a three-month low of 79.002 yen against the yen and was last trading at 79.48 yen per dollar.

The 79.00 yen level is seen as a major support level, while strong resistance is at 80.41 yen, the cloud top on the weekly Ichimoku chart.

The Australian dollar was steady at $0.9855, up from a six-month low of $0.9690 hit a week ago.

In addition to worries about Europe, concerns over a slowdown in Australia’s main export market China and other emerging economies have also weighed on the growth-sensitive Australian dollar for about a month. (Additional reporting by Masaaki Kitano in Singapore; Editing by Ron Popeski)

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