REFILE-FOREX-Euro retreats from four-month highs on Spain worries
* Euro slips as Spanish bonds yields rise
* German ZEW survey awaited
* Speculation BOJ may ease policy seen weighing on yen
By Anirban Nag
LONDON, Sept 18 (Reuters) - The euro fell on Tuesday, succumbing to profit taking after rallying to four-month highs against the dollar and yen a day earlier, with a renewed rise in peripheral bond yields likely to weigh on sentiment.
The yen ceded ground against the dollar on speculation the Bank of Japan might loosen policy after the U.S. Federal Reserve launched a fresh round of monetary stimulus last week.
The euro stood at $1.3080, down 0.3 percent on the day, having hit $1.3173 hit on Monday, its highest since May 4.
Traders said option barriers at $1.3200 appeared safe for now, with bids from sovereign investors cited at $1.3080/90 and stop-loss orders below $1.3070.
The euro has rallied about 9 percent from a two-year low of $1.2042 in July when investors were worried the currency bloc might be heading for a break-up as Spanish and Italian borrowing costs soared.
Two-year Spanish bond yields rose on Tuesday, up 4.8 basis points on the day at 3.45 percent.
Optimism the European Central Bank's new bond buying scheme will help Madrid weather the debt crisis has helped lift the euro, though Spain's apparent reluctance to seek a bailout has worried investors, contributing to higher bond yields.
"Unless we get this uncertainty out of the way, we expect the euro to face some resistance around its highs," said Adam Myers, senior currency strategist at Credit Agricole.
Investors' immediate focus was a German analyst and investor sentiment survey. The ZEW economic sentiment survey is forecast to show a slight improvement though current conditions are expected to ease in September, compared with August.
A positive surprise could see the euro bounce, but those gains are likely to be limited, traders said.
The euro fell 0.3 percent to trade at 102.90 yen, having rallied to a four-month high of 103.858 yen on Monday.
The dollar traded at 78.70 yen, having risen as high as 78.93 yen on Monday on buying by speculative accounts such as hedge funds, traders said. It hit a seven-month low of 77.13 yen just last Thursday.
"There's quite a lot of expectations about the BOJ's easing priced in now. The dollar/yen is unlikely to fall much ahead of the outcome of the BOJ's policy meeting," said a senior trader at a European bank, referring to the bank's two-day meeting that started on Tuesday.
The Fed's announcement last week of a new asset-buying programme has led to speculation the BOJ might also ease policy to prevent the yen from strengthening.
"We expect the Bank of Japan to increase its asset buying fund by five trillion yen ($63 billion). If it does, the dollar might have a chance to break resistance around 79.50 yen. Alternatively, if it doesn't, the dollar will fall below 78 yen," said Osamu Takashima, chief Japan FX strategist at Citibank.
A rise in U.S. bond yields after the Fed's action also supported the dollar. The 10-year yield stood near a four-month high of 1.89 percent hit on Friday.
Dollar/yen has traditionally been highly correlated with U.S. yields, partly based on the perception that they should attract more dollar-buying by Japanese investors.
The Australian dollar traded at $1.0430, pressured by worries that slower growth in China would put the brakes on Australia's mining boom.
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