The euro eased against the dollar and hovered near a record low versus the Australian dollar on Friday, and was seen on shaky ground due to worries about Spain's fiscal woes and as investors hunt for higher yields. Weak demand at a bond auction pushed Spain's 10-year bond yield above 7 percent on Thursday for the first time in more than a week, intensifying doubts over whether Madrid can avoid a full-blown bailout.
The euro fell 0.2 percent to $1.2253, staying above a two-year low of $1.2162 hit on trading platform EBS last week. The single currency held steady against the Australian dollar at A$1.1779, stuck near Thursday's record low around A$1.1735. Besides investor jitters over the euro zone's sovereign debt crisis, the euro has taken a hit this month after the European Central Bank lowered the deposit rate, which acts as the floor for euro zone money market rates, to zero.
Also, the fact that two-year bond yields have dipped into negative territory recently in Germany and the Netherlands, two euro zone countries in relatively good fiscal health, has fanned talk about the possibility of a fresh investor shift out of euro zone assets.
Negative yields on such euro zone assets could entice investors who are bearish on the euro's outlook to shift money elsewhere, market players say. "There is a global trend in which the euro seems like the weakest currency," said Hiroshi Maeba, head of FX trading Japan for UBS in Tokyo, adding that falls in shorter-term euro zone interest rates have further eroded the incentive for holding euros.
The euro has been weighed down against the yen recently due to selling by institutional investors, Maeba added. The euro declined 0.2 percent against the yen to 96.30 yen. A drop below 95.59 yen would take the euro to its lowest level against the yen since November 2000.
The euro has already dropped roughly 10 percent versus the Australian dollar compared with a peak of A$1.3028 hit in May. The euro may still fall even further, said Jesper Bargmann, head of Asia G11 spot FX for RBS in Singapore. "I think there is a bit of a theme going on, and the biggest single mover is central bank reserve diversification out of the euro, and into especially Aussie," Bargmann said.
The ECB deposit rate cut and subsequent drop in money-market rates has also stirred talk of euro-funded carry trades, in which investors effectively borrow low-yielding currencies to invest in higher-yielding currencies and assets. The dollar rose 0.1 percent versus the yen to 78.60 yen, but was still near Thursday's six-week low of 78.42 yen.