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FOREX-Euro slides as Merkel comments spook market
* Traders sell euro after media report of Merkel comments
* Markets await second day of Fed chief Bernanke's testimony
* Euro hits record low vs Australian dollar
By Michael Szabo
LONDON, July 18 (Reuters) - The euro fell broadly on Wednesday after a media report that German Chancellor Angela Merkel said she could not be sure the European project would work spooked investors already cautious about the outlook for the common currency.
Although Merkel went on to say she was optimistic the project would succeed - a reiteration of her usual line on the topic - euro sold off broadly.
It fell to a session low against the U.S. dollar, a record low against the Australian dollar and an 11-1/2 year low versus the Swedish crown as euro zone peripheral bond yields rose, adding to downbeat market sentiment.
Merkel's told her own party: "We have not yet shaped the European project so that we can be sure that everything will turn out well, we still have work to do. I am optimistic that we will succeed."
The euro fell around 0.6 percent versus the dollar, from flat on the day before the report came out, to $1.2217, close to a two-year low of $1.2162 hit last week, as traders seized on the first part of Merkel's statement.
"Overall the picture is still very negative and the news flow of policy and data is working against the euro this morning," said Ian Stannard, head of European FX strategy at Morgan Stanley.
Comments from the European Central Bank policymaker Joerg Asmussen over the future of the euro zone's permanent bailout fund and Europe's growing north-south divide also weighed on the currency, market players said.
The euro found some demand on Tuesday after U.S. Federal Reserve chairman Ben Bernanke left the door open to more quantitative easing to boost growth in the world's biggest economy.
He speaks before Congress at 1400 GMT on Wednesday and is expected to reiterate his message from Tuesday's testimony, in which he was downbeat on the U.S. economy but offered no explicit hints of further QE.
Some analysts said perceived riskier currencies including the euro could come under pressure if the Fed appeared to be unwilling to ease policy further. If, on the other hand, policymakers looked more likely to pump more dollars into the system, the greenback could soften.
The dollar gained 0.3 percent against a basket of currencies, but slipped 0.1 percent versus the yen to 78.96 yen.
The overall trend was still for a weaker euro given concerns about high Spanish and Italian bond yields and concerns Spain will not be able to avoid a full-scale bailout.
Bad loans at Spanish banks hit an 18-year high in May at 8.95 percent of their outstanding portfolios, up from 8.72 percent in April, Bank of Spain data showed.
"We suspect that continued signs of economic malaise in Europe and stress in European fixed income markets will keep the single currency under pressure over the medium term," Citi strategist Andrew Cox said in a note.
The euro slipped against the Japanese yen to 96.51 EURJPY=R>, eyeing a six-week low of 96.17 yen touched on Monday as investors sought safer ground, including bonds offering negative yields in countries such as Germany and Finland.
Germany sold bonds at a negative yield at auction for the first time on Wednesday.
"Core rates in Europe going to increasingly negative levels continue to undermine support for the euro zone," Morgan Stanley's Stannard said, adding investors continued to flee to higher-rated assets outside the euro zone.
The euro hit an 11-1/2 year low of 8.4785 crowns against the Swedish crown, and a record low of A$1.1857against the Australian dollar.
Sterling hit a session low of $1.5607 after Bank of England minutes said new credit measures might prompt policymakers to reconsider their decision to reject cutting interest rates, though not for several months.
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