* Euro retreats after hitting 2-week high vs dollar
* Worries about Spain's credit markets hit sentiment
* U.S. housing starts plunge; industrial output rises
(Updates prices, adds comment, changes byline)
By Steven C. Johnson
NEW YORK, June 16 (Reuters) - The euro slipped on Wednesday
as renewed concerns about Spain's credit and banking system
toppled it from an earlier two-week high against the dollar.
Data showing U.S. housing starts plunged in May to their
lowest level in five months also weighed on the euro, though
stronger-than-expected industrial production data kept losses
in check. The currency's fortunes, like U.S. stocks, were tied
closely on Wednesday to investor risk appetite, analysts said,
and both wobbled as market anxiety rose. See []
Though still up 1.6 percent this week, the euro failed for
a second day to break convincingly through the $1.2350 area,
retreating after a Spanish newspaper reported that the European
Union, International Monetary Fund and U.S. Treasury were
drawing up an emergency credit line for Spain.
The European Commission denied the report, but the premium
investors demand to hold 10-year Spanish bonds over German
bunds hit the highest level in the euro's 11-year history.
[]
"Worries about Spain's situation wiped out whatever risk
appetite was left in the market," said Matthew Strauss, senior
analyst at RBC Capital Markets in Toronto. "The euro had a good
run from below $1.19 last week to around $1.2350, but failure
to go further is reflective of the underlying market anxiety."
The euro was last changing hands at $1.2315 <EUR=>, down
0.1 percent, after earlier hitting $1.2354, a two week high.
The euro was off 0.1 percent at 112.54 yen <EURJPY=> and the
dollar was flat at 91.38 yen <JPY=>.
Spain's central bank said Wednesday it will publish bank
stress tests and Germany is coordinating disclosure at the EU
level, moving Europe's banking sector closer to putting its
financial health on public display. See []
"The banks in Spain are facing a liquidity freeze with
other banks reluctant to lend to Spanish banks," said Fergal
Smith, managing market strategist, Canada, at Action Economics
in Toronto. "That's helped cap the recent rally in the euro and
in riskier assets."
The dollar fell to a one-month low of 1.1251 Swiss francs
<CHF=> ahead of Thursday's Swiss National Bank meeting before
easing to 1.1278 francs, down 0.5 percent. Traders said option
volatility was high, indicating anxiety about the meeting.
The SNB is expected to keep interest rates low but may
announce measures to drain excess money from the economy after
having flooded the market with francs since 2009 to keep the
currency from appreciating too rapidly. []
SELL EURO ON RALLIES
After hitting $1.1876 last week, its lowest level since
2006, the euro has risen more than 3 percent against the
dollar, though analysts said the rally appears driven by
technical considerations rather than optimism about Europe's
debt problems or economic outlook.
"When we bounced from levels below $1.19, it always seemed
we'd get to somewhere between $1.22 and $1.24," Strauss said.
"So I wouldn't be surprised to move back to $1.19."
Fabian Eliasson, vice president of FX sales at Mizuho
Corporate Bank in New York, said he expects the euro to fall
below $1.20 as trading volume declines in the summer months.
"I don't think the worst is over. I think you're going to
see further downgrades. The recovery there is going to be very
slow," he said. "If anything, I would sell it on rallies."
But Commerzbank strategists said they expect a run up to
$1.2445-$1.2570, the 38.2 percent retracement of the move down
from April.
Signals from the currency options markets showed a slight
bias toward one-month euro puts, suggesting the trend for the
currency is still lower. []
(Additional reporting by Wanfeng Zhou and Vivianne
Rodrigues)
(Editing by Theodore d'Afflisio)
