* 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 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
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
"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.