4 Min Read
* Euro falls after Spain auction deemed disappointing
* Dollar extends gains after Fed curbs QE speculation
* ECB rate decision 1145 GMT, no change expected
By Nia Williams
LONDON, April 4 (Reuters) - The euro hit a two-week low versus the dollar on Wednesday as debt-laden Spain's borrowing costs jumped at an auction and after Federal Reserve minutes reduced expectations for further monetary stimulus in the United States.
Analysts said the greenback was likely to hold its gains versus the euro as market players focused on a European Central Bank meeting later in the session, at which the bank is widely seen keeping rates on hold.
The shared currency dropped around 0.5 percent on the day against the dollar to $1.3161, its lowest level since March 22. Euro losses helped the dollar index extend its gains to 79.673, the highest level in more than a week.
"The latest leg down today was on some slight disappointment in the auction, and (peripheral) yield spreads are wider as a result," said Adam Cole, head of global FX strategy at RBC Capital Markets.
"But the bigger picture decline in euro today is more about the rise in U.S. yields that came in the wake of the FOMC (Federal Open Market Committee) yesterday."
Spain sold 2.6 billion euros of government bonds, towards the lower end of its target range and at higher yields than at previous sales. Its borrowing costs had been expected to rise given growing concerns over Spain's public finances.
Some analysts said the euro could come under further pressure depending on the tone of the European Central Bank news conference at 1230 GMT, following a rate decision at 1145 GMT.
High inflation in the euro zone was expected to prevent the ECB from easing monetary policy further, but market players also expected ECB President Mario Draghi to sound cautious on the region's economic outlook.
In contrast, minutes published on Tuesday showed only two of the policy-setting FOMC's 10 voting members saw the case for additional monetary stimulus. The statement sparked a sell-off in U.S. Treasuries, with the 10-year yield last trading at 2.26 percent.
"The euro is likely to adjust lower on the back of the euro zone economy underperforming, which will require the ECB to run a loose policy stance," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi.
"There could potentially be a slightly more dovish stance from the ECB today, and that contrast with the Fed will provide euro/dollar with some downward momentum."
Support for the euro was seen around its 100-day moving average at $1.3155. Hardman said the euro may test that level but was unlikely to break below the bottom end of its recent trading range roughly between $1.30 and $1.35 in the near-term.
The shared currency also struggled against the yen, falling more than 1 percent on the day to 108.24 yen.
The U.S. currency rallied against the Australian dollar, which dropped to an 11-week low of US$1.0246 after Australia posted a surprise trade deficit, fuelling expectations its central bank would cut interest rates in May.
It broke through support at $1.0261, the 50 percent retracement of the November to February rally from US$0.9664 to US$1.0857, leaving the door open to a test of US$1.0120, the 61.8 percent retracement of the same rally.
Meanwhile the yen regained ground against the dollar after coming under heavy selling pressure following the Fed minutes and spike in U.S. Treasury yields.
The greenback was last down 0.6 percent on the day at 82.30 yen, retreating from a session high of 82.94 yen.
Many market players have been betting on a weaker yen trend since the Bank of Japan's unexpected easing of monetary policy in February. Speculation that the Fed could tighten its own policy faster than previously expected - raising the return for holding dollars - have also weighed on the Japanese currency.