* Spanish banking problems weigh heavily on euro
* Euro hits near 2-yr low vs dollar; dollar index at 20-mth
* Focus on rising Spanish debt yields and risk of bailout
* Italy pays hefty price to sell bonds
By Jessica Mortimer
LONDON, May 30 The euro fell to it lowest in 23
months against the dollar on Wednesday as concerns grew about
Spain's ailing banking sector and soaring borrowing costs, and
after Italy was forced to pay dearly to sell debt.
The euro was seen highly vulnerable to further falls, with
many analysts looking for a drop towards $1.20.
Concerns are growing that Spain may have to tap debt markets
at a time when bond yields are near unsustainable levels. Market
players fretted that it may be forced to seek an international
Adding to the euro's woes, Italy sold bonds at a very high
cost, with 10-year yields topping 6 percent for the first time
this year as sentiment on the indebted economy looked vulnerable
to contagion from Spain's worsening problems.
The euro fell around half a percent to $1.2433 on trading
platform EBS, its lowest since early July 2010, as real money
and institutional investors stepped up sales of the currency.
"The euro is in an extremely vulnerable position and
downside risks are very strong indeed ... The Spanish banking
crisis has the potential to knock the stuffing out of the euro
zone irrespective of the Greek election results," said Jane
Foley, senior currency strategist at Rabobank.
"The issues for Spain are undoubtedly huge and most people
are coming round to the idea that it will need to go outside of
its borders for assistance. The longer it delays the more the
risk of a bank run."
More falls could see the euro test a reported options
barrier at $1.2400. Below there it has little chart support
until $1.2151, a low hit in late June 2010, and then the 2010
low of $1.1876.
The common currency also lost more than 1 percent against
the safe-haven yen, taking it to a four-month low of
The latest drop in the euro comes as the 10-year Spanish
government bond yield continued to inch towards 7 percent. That
was the level when other peripheral euro zone countries had to
seek an international bailout.
The cost of insuring against a Spanish default hit new highs
and the Madrid stock market hit a nine-year low.
The euro had gained some reprieve earlier in the week after
Greece's pro-bailout parties regained an opinion poll lead ahead
of elections on June 17, easing market fears of a messy Greece
exit from the euro zone.
But the single currency's bounce proved short-lived as the
market's focus shifted to Spain. The euro's failure to breach
resistance near $1.2625 left the euro looking vulnerable.
"Our short-term fair value model is showing the euro should
be around $1.21 with the euro a sell against a broad range of
currencies," said Melinda Burgess, currency strategist, at RBS
A government source told Reuters on Tuesday that Spain would
likely recapitalise Bankia, which asked for 19 billion
euros on Friday, by issuing new debt and possibly drawing cash
from the bank restructuring fund and Treasury
The euro's losses benefited the safe-haven dollar and yen,
helping the dollar index, which measures its value against a
basket of currencies, rise to a 20-month high of 82.749.
Technical analysts said a monthly close about the 100-month
average in the dollar index around 81.82 may herald a shift in
the longer-term trend of the dollar and reverse a multi-year
The dollar also rose to a 15-month high against the Swiss
franc at 0.96593 francs.
The higher-yielding Australian dollar fell 0.8 percent to
$0.9765, slipping towards a six-month low at $0.9690,
after weaker-than-expected retail sales data underscored the
case for interest rate cuts.