* Euro falls as Spanish stocks slide
* Sterling rallies to 19-mth high vs euro after BoE minutes
* Market bracing for Spanish bond auction on Thursday
By Nia Williams
LONDON, April 18 The euro dropped against the
dollar on Wednesday, dragged down by heavy falls in Spanish
stocks and losses against sterling, and it looked set to stay
under pressure from Spain's budget troubles and the potential
repercussions for the currency zone.
Some strategists said comments from European Central Bank
policymaker Jens Weidmann that countries should not expect the
central bank to tackle rising debt yields by buying government
bonds prompted the weakness in stocks.
Data showing Spanish banks' bad loans rose to their highest
level since 1994 also spooked investors.
The euro dropped 0.4 percent against the dollar to
$1.3070, within sight of a two-month low of $1.2994 hit briefly
last week. It also came under heavy pressure against sterling
after less dovish than expected Bank of England
Market players said the euro could post further losses ahead
of a Spanish bond auction on Thursday, and any evidence of poor
demand and high yields at the auction would aggravate concerns
about Spain's fragile fiscal position.
"The Spanish equity market has been hit drastically today,
we also had Mr Weidmann's comments coming out. This negative
impact on capital markets in Europe is the driver for euro
weakness," said Hans Redeker, head of global FX strategy at
"For me it is just a question of time before we break $1.30.
If we have a mediocre or weak auction tomorrow then it's going."
The euro has traded roughly between $1.30 and $1.35 since
January, and has struggled to rise above $1.32 since early
April. CitiFX Wire said in a note that its traders were looking
to buy the range-bound currency on dips.
Traders also cited selling by Swiss investors after French
President Nicholas Sarkozy said a strong euro hurt exporters and
the euro's exchange rate should be up for discussion with the
European Central Bank.
Sterling rallied against the euro and dollar after minutes
showed the Bank of England was concerned about high inflation
persisting into the medium term and one policymaker dropped his
long-standing call for more stimulus.
The euro fell 0.8 percent against the pound to
81.78 pence, its lowest level in 19 months and below reported
options barriers at 82 pence.
Meanwhile, the Swedish crown rose to a two-week high against
the euro of 8.8350 crowns after the Riksbank left
rates on hold and said it expected to keep them there for at
least a year.
The dollar rose 0.6 percent against the yen to 81.34
yen. The euro traded up 0.2 percent on the day at
106.35 yen, holding above Monday's low of 104.62 yen.
In recent weeks there has been a growing perception in the
market that the U.S. Federal Reserve may not hint at further
easing at its April 24-25 meeting, in contrast to expectations
the Bank of Japan will take fresh easing steps on April 27.
Bank of Japan deputy governor Kiyohiko Nishimura said on
Wednesday that the central bank was ready to ease policy further
if necessary to help Japan's economy recover.
Those expectations weighed on the yen, which also came under
pressure ahead of Japanese trade data on Thursday that is
forecast to show Tokyo's trade balance swung to deficit in March
after a small surplus in February.
Some analysts said the market was pricing in further easing
too aggressively, opening the door to a rebound in the yen.
"Even if they get 5 trillion yen extra in asset purchases it
probably won't be enough because the market is expecting so
much. We recommend holding dollar/yen shorts going into the
meeting," said Geoff Kendrick, currency strategist at Nomura.