The euro wobbled near a two-year low against the dollar on Tuesday as concerns about the cost of shoring up Spain's banking system pushed up its debt yields, offsetting a slight easing in worries about Greece. The 10-year Spanish bond yield rose to around 6.5 percent, driving the risk premium on its government debt over German Bunds to a euro-era high of 515 basis points, raising fears the euro zone's fourth biggest economy may fall victim to the debt crisis.
"Although pessimism over Greece is somewhat receding, worries about Spain are growing, with markets watching whether the Spanish bond yield will hit the seven percent mark," said Masafumi Yamamoto, chief FX strategist at Barclays in Tokyo. A 10-year yield of 7 percent in a eurozone country is seen as critical as the three countries that requested bailouts all did so soon after their bond yield rose above that level.
The euro stood at $1.2535, near last week's two-year low of $1.2495, having failed to clear resistance at previous support around $1.2625 for three days in a row. The euro gave up most of the gains made on Monday after Greek polls showed more support for pro-bailout parties ahead of the country's election on June 17. That eased fears Greece may walk out of the euro zone, potentially unleashing a chain reaction in other indebted countries.
The currency is supported for now by bids just below $1.25, though there are more stop-loss offers near $1.2450, traders said. Against the yen, the common currency fetched 99.64 yen, near a four-month low of 99.37 yen hit last week. Many traders expect further downside in the euro as they fear troubles at Spanish banks hit by a bust in property could add further strains on Madrid's efforts to rein in its debt.
"There seems to be distrust in the market on Spain after Bankia asked for a bailout of 19 billion euros just weeks after the government had injected 4.5 billion in the bank," said Katsunori Kitakura, associate general manager of market making at Sumitomo Mitsui Trust Bank, referring to the country's fourth-biggest lender. Prime Minister Mariano Rajoy on Monday again ruled out seeking outside aid to revive Spain's banking sector, though investors doubt if that would be possible.
Any buying in the euro may also be curbed ahead of Ireland's referendum on Europe's new fiscal treaty on Thursday, although the market is cautiously optimistic that the Irish will support the treaty on fear that a "no" vote could add fuel to the fire. While the treaty needs the approval of only 12 of the 17 euro zone countries to be ratified, a rejection by the Irish - the only nation offered a popular vote on the pact - would undermine Europe's strategy for overcoming the crisis.
The risk averse mood helped support the yen. The dollar stood not far from its three-month low of 79.002 yen, last trading at 79.48 per dollar. The 79.00 yen level is seen as a major support, while strong resistance is seen at 80.41 yen, the top of cloud on weekly Ichimoku chart. The Australian dollar held steady at $0.9855, staying above a six-month low of $0.9690 hit almost a week ago. In addition to worries about Europe, concerns about a slowdown in China - Australia's main export market - and other emerging economies have weighed on the growth-sensitive Aussie for about a month.