FOREX-Euro falls vs dollar as Spain worries mount
* Euro falls as Spanish stocks slide
* Sterling rallies to 19-mth high vs euro after BoE minutes
* Market bracing for Spanish bond auction on Thursday
By Nia Williams
LONDON, April 18 (Reuters) - The euro dropped against the dollar on Wednesday, dragged down by heavy falls in Spanish stocks and losses against sterling, and it looked set to stay under pressure from Spain's budget troubles and the potential repercussions for the currency zone.
Some strategists said comments from European Central Bank policymaker Jens Weidmann that countries should not expect the central bank to tackle rising debt yields by buying government bonds prompted the weakness in stocks.
Data showing Spanish banks' bad loans rose to their highest level since 1994 also spooked investors.
The euro dropped 0.4 percent against the dollar to $1.3070, within sight of a two-month low of $1.2994 hit briefly last week. It also came under heavy pressure against sterling after less dovish than expected Bank of England minutes.
Market players said the euro could post further losses ahead of a Spanish bond auction on Thursday, and any evidence of poor demand and high yields at the auction would aggravate concerns about Spain's fragile fiscal position.
"The Spanish equity market has been hit drastically today, we also had Mr Weidmann's comments coming out. This negative impact on capital markets in Europe is the driver for euro weakness," said Hans Redeker, head of global FX strategy at Morgan Stanley.
"For me it is just a question of time before we break $1.30. If we have a mediocre or weak auction tomorrow then it's going."
The euro has traded roughly between $1.30 and $1.35 since January, and has struggled to rise above $1.32 since early April. CitiFX Wire said in a note that its traders were looking to buy the range-bound currency on dips.
Traders also cited selling by Swiss investors after French President Nicholas Sarkozy said a strong euro hurt exporters and the euro's exchange rate should be up for discussion with the European Central Bank.
Sterling rallied against the euro and dollar after minutes showed the Bank of England was concerned about high inflation persisting into the medium term and one policymaker dropped his long-standing call for more stimulus.
The euro fell 0.8 percent against the pound to 81.78 pence, its lowest level in 19 months and below reported options barriers at 82 pence.
Meanwhile, the Swedish crown rose to a two-week high against the euro of 8.8350 crowns after the Riksbank left rates on hold and said it expected to keep them there for at least a year.
The dollar rose 0.6 percent against the yen to 81.34 yen. The euro traded up 0.2 percent on the day at 106.35 yen, holding above Monday's low of 104.62 yen.
In recent weeks there has been a growing perception in the market that the U.S. Federal Reserve may not hint at further easing at its April 24-25 meeting, in contrast to expectations the Bank of Japan will take fresh easing steps on April 27.
Bank of Japan deputy governor Kiyohiko Nishimura said on Wednesday that the central bank was ready to ease policy further if necessary to help Japan's economy recover.
Those expectations weighed on the yen, which also came under pressure ahead of Japanese trade data on Thursday that is forecast to show Tokyo's trade balance swung to deficit in March after a small surplus in February.
Some analysts said the market was pricing in further easing too aggressively, opening the door to a rebound in the yen.
"Even if they get 5 trillion yen extra in asset purchases it probably won't be enough because the market is expecting so much. We recommend holding dollar/yen shorts going into the meeting," said Geoff Kendrick, currency strategist at Nomura.