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NEW YORK (Reuters) - The euro ended a roller coaster week sharply lower and may come under further selling pressure as Greece's bailout moves back into focus, and as the European Central Bank chimes in on monetary policy next week.
The euro dropped against the dollar for a third straight day on Friday and was on track for its worst week since mid-December after debt-burdened Spain challenged the European Union's new fiscal pact.
Spain, the euro zone's fourth-largest economy, set a softer 2012 deficit target than originally agreed to under the euro zone's austerity drive.
Earlier in the global session, the euro was pressured by a surprise slide in retail sales in Germany, the euro zone's largest economy.
However, the euro initially gave up ground on Wednesday after the European Central Bank offered 530 billion euros ($699.86 billion)to 800 banks.
The euro had gained smartly heading into the ECB's auction, its second since December, but tumbled as people viewed the ECB's action as tantamount to quantitative easing.
The ECB action contrasts with Federal Reserve Chairman Ben Bernanke's testimony to Congress this week, which steered clear of mentioning a third round of bond buying.
"This week's massive ECB liquidity injection into the market is also keeping the single currency vulnerable to selling, particularly against its higher yielding and riskier counterparts," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
Uncertainty surrounding Greece's bailout should keep the euro under pressure and next week could prove pivotal.
Eurogroup President Jean-Claude Juncker said Greece, the epicenter of the crisis, has acted to secure a second bailout, but the money can only be paid out after a bond swap between Athens and private investors is concluded by March 9.
Currency speculators in the latest week reduced bets in favor of the U.S. dollar and turned short on the Japanese yen, according to data from the Commodity Futures Trading Commission released on Friday.
"A lot of the more vulnerable shorts were pushed out of the market last week, but as technicals turn back to bearishness these are likely to be rebuilt," said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto.
The euro dropped to a low of $1.3185 and last traded at $1.3198, down 0.9 percent. The euro lost about 2 percent against the dollar this week, its worst week since the middle of December.
The euro earlier in the global session was pressured by a surprise slide in retail sales in Germany, the euro zone's largest economy.
George Davis, chief technical analyst at RBC Capital Markets in Toronto, said the euro-dollar trade formed a bearish key reversal on Wednesday, causing prices to take out support at $1.3284 on an intraday basis.
"A daily close below $1.3284 would likely commence a corrective phase that highlights $1.3028 as a downside target - especially with the daily studies also forming a bearish divergence from overbought levels."
Resistance is at $1.3284 and $1.3485, Wednesday's high, he said.
Looking ahead, the ECB will announce its interest rate decision on Thursday, but following this past week's auction most economists believe it will leave rates unchanged.
In the U.S., crucial data will emerge on Friday when the Labor Department reports February's non-farm payrolls.
Meanwhile, the dollar climbed to 81.78 yen, according to Reuters data, its highest level since last May. The Bank of Japan is seen focused on monetary easing, a policy that could weaken the yen and alleviate the need for direct intervention in currency markets.
RBC's Davis said the dollar-yen trade is attempting to break above a potential double top at 81.47 and a daily close above that would reaffirm the recent uptrend and expose 82.21 and 82.73 as the next resistance targets.
Double tops and double bottoms are considered to be among the most powerful chart formations indicating a reversal in the in the direction of an overall trend.
Support is located at 80.84 and 80.02, with a close below 80.02 required in order to generate a corrective phase, Davis said.
Additional reporting by Nick Olivari and Gertrude Chavez-Dreyfuss; Editing by Diane Craft