* Euro falls to lowest in nearly two years on Swiss franc
* Speculation of more ECB action drives yields to record lows
* Sterling & Aussie show some resilience
By Ian Chua
SYDNEY, Aug 26 The euro stayed on the back foot early on Tuesday, having extended its decline particularly against the Swiss franc overnight as markets toyed with the idea of another round of policy easing by the European Central Bank.
Hot on the heels of dovish comments from the head of the ECB, data on Monday showed German business sentiment sagged for the fourth month running, while a row over a lack of economic growth led the French government to resign.
The common currency skidded to its lowest in nearly two years on its Swiss counterpart to 1.2072, a move that could test the Swiss National Bank's three-year old pledge to cap its currency at 1.20 per euro.
Investors also sold the euro against the yen and sterling, pushing it to a near one-week low of 137.22 yen and a two-week low of 79.50 pence. Against the dollar, the common currency traded at a one-year trough of $1.3184.
Speculation the ECB was preparing a programme of asset purchases drove most euro zone government bond yields to record lows on Monday. Germany's two-year yield dipped to a 16-month low of five basis points below zero percent.
"We expect the broader trend of euro weakness to persist and remain short EURGBP in our recommendations portfolio targeting a decline to 0.76," analysts at BNP Paribas wrote in a note to clients.
They added that data on Friday could show a further decline in the euro zone annual inflation rate to just 0.2 percent.
"This should add to the growing list of potential triggers for further ECB easing and weigh on the euro."
Weakness in the euro helped underpinned the dollar index , which remained tantalisingly close to its September 2013 peak of 82.671. A break there will take it back to highs not seen since July last year.
On the yen, the dollar held just above 104.00, having peaked at a seven-month high of 104.49 overnight.
Sterling bounced off a five-month low of $1.6501 to last trade at $1.6568, making it one of the best performers against the broadly firmer greenback. Trading was thin, however, due to a UK holiday on Monday.
The Australian dollar was also quite resilient, ceding only a bit of ground against the U.S. dollar. It dipped below 93 U.S. cents, but was still well within its 92-95 cent band seen in the past five months.
That support partly reflected the market's preference to buy the Aussie against the New Zealand and Japanese currencies. The Aussie scaled a nine-month peak of NZ$1.1169 and reached a near 15-month high of 97.27 yen.
Trading in Asia is likely to be subdued in the absence of any meaningful economic data. Later in the session, U.S. durable goods data could inject a bit of life into the market given there was a chance it would show a huge rise in aircraft orders.
Forecasts go as high as a 38 percent increase in headline orders, though the breakdown is likely to be more subdued. (Editing by Shri Navaratnam)