Euro slides for second straight week as Spain woes persist

NEW YORK Fri Sep 28, 2012 4:59pm EDT

Euro notes are pictured at a bank in this photo illustration taken in Seoul June 18, 2012. REUTERS/Lee Jae-Won

Euro notes are pictured at a bank in this photo illustration taken in Seoul June 18, 2012.

Credit: Reuters/Lee Jae-Won

NEW YORK (Reuters) - The euro fell against the dollar on Friday, closing out a second straight week of declines, as uncertainty persisted about Spain's bailout prospects despite a generally positive audit report on the country's struggling banks.

An independent audit from consultancy Oliver Wyman released on Friday showed that Spain's banking industry would need 59.3 billion euros in additional capital to cope with a serious economic downturn. Spain, however, said it would only ask for 40 billion euros in European aid for its banks.

European governments have allotted a 100-billion-euro credit line for Spain's banking sector.

The audit report was viewed as positive because the final figure on the country's banking capital needs was largely in line with market expectations, removing another layer of uncertainty.

The euro did trim losses versus the dollar following the news on the bank audit report, but the general stance on the common currency remained cautious.

"There's still a lot of questions about Spain, mainly related to whether or not it would seek a bailout," said Brian Kim, currency strategist at RBS Securities in Stamford, Connecticut.

"Overall, there are a lot of implementation risks in terms of all the measures committed by European policymakers to deal with the euro zone crisis."

In late afternoon trading, the euro was down 0.5 percent at $1.2846, not far from Thursday's two-week low of $1.2828. The euro faces resistance at $1.2960, the 38.2 percent retracement of its September 17-27 slide, while the 200-day moving average around $1.2825 is expected to serve as support.

For the week, the single currency was down 1.0 percent against the dollar, after losses of 1.1 percent the previous week. It was the largest two-week loss for the euro since mid-July.

But the euro fared better against the greenback in September and appreciated 1.5 percent for the quarter.

The gains largely reflected diminished debt crisis fears following assurances made during the summer by European Central Bank President Mario Draghi that the ECB would do whatever it takes to preserve the euro.

Also helping the euro this quarter was the ECB's announcement this month that it would buy bonds from heavily indebted countries.

Analysts, however, said the euro's gains may be limited. Longer term, concerns that Spain would be unable to implement its budget plans and bring down its deficit could weigh on the common currency.

Madrid on Thursday announced a detailed plan for economic reforms and a budget based mainly on spending cuts rather than tax measures, in what many analysts saw as an effort to pre-empt the conditions for a bailout.

Barclays Capital analysts said a bailout request from Spain seemed inevitable, adding that the troubled country may seek aid at around the European Union summit on October 18.

A request from Spain is a precondition for the ECB to start buying its debt to bring down its borrowing costs. Analysts and traders said this would lift the euro, but Spain has appeared reluctant to take that step.

Barclays sees the euro rising to $1.35 in three months, but said it would be difficult to position for a bounce in the single currency ahead of a formal bailout request.

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Moody's rating agency is due to review Spain's sovereign rating by the end of this month and may downgrade it to junk status. On Thursday, ratings agency Egan-Jones cut Spain's sovereign rating further into junk status.

In addition, much of the euro zone is mired in a recession, which should keep ECB monetary policy accommodative for quite some time. A rate cut may be in the pipeline as well, perhaps as soon as its monthly policy meeting next Thursday, analysts said.

In other currencies, the yen was broadly weaker. It fell against the dollar on Friday, after rising for seven straight sessions. The dollar last traded at 77.98 yen, up 0.5 percent on the day, its largest one-day gain in two weeks.

The euro was little changed versus the yen at 100.17 yen.

Next week, investors will focus on the U.S. non-farm payrolls report. A Reuters poll showed economists expect a gain of 115,000 jobs for the month of September

Given the open-ended nature of the Federal Reserve's bond-buying program and its focus on the U.S. labor market, the outcome of this data will be crucial for the dollar's fate.

(Additional reporting by Julie Haviv; Editing by Leslie Adler)

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