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FOREX-Euro dips on worries about Spain, seen pressured on crosses
* Euro stuck near record low vs Australian dollar
* Falls in short-term rates, negative yields, weigh on euro
* Dollar/yen supported by short-covering
By Masayuki Kitano
SINGAPORE, July 20 (Reuters) - The euro fell against the dollar and hovered near a record low versus the Australian dollar on Friday, undermined by worries about Spain's fiscal woes and recent falls in shorter-term euro zone interest rates.
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.
Comments from German Finance Minister Wolfgang Schaeuble did the euro no favours. Schaeuble said Spain's financial troubles are far from over and its government should be ultimately responsible for European aid to its banks.
The euro fell 0.2 percent to $1.2261, staying above a two-year low of $1.2162 hit on trading platform EBS last week.
The single currency eased 0.1 percent against the Australian dollar to A$1.1768, 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.
The deposit rate cut and subsequent drop in shorter-term interest rates have stirred talk of euro-funded carry trades, and provided the impetus for a fresh leg down in the euro.
"The euro is being viewed as a funding currency and there are increasingly active moves on the back of that," said a trader for a major Japanese bank in Bangkok.
In carry trades, investors borrow low-yielding currencies such as the euro to invest in higher-yielding currencies and assets.
In addition, the fact that German and Dutch two-year bond yields have turned negative recently has fanned talk about the possibility of an investor shift out of euro zone assets.
"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.
"I think we could see this trend in euro/Aussie continue over the longer term," Maeba said, referring to the euro's weakness against the Australian dollar.
The euro held steady against the yen at 96.45 yen , having dipped to as low as 96.131 yen on Thursday, its lowest level since June 1.
The dollar edged up 0.2 percent versus the yen to 78.69 yen , supported by short-covering and inching away from Thursday's six-week low of 78.42 yen.
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