* Euro failure at $1.2355 signals retreat to $1.2175 support
* Spanish bond auctions seen as litmus test for euro
* High-yielders off peaks, could see further pullback
By Hideyuki Sano
TOKYO, June 17 (Reuters) - The euro slipped from its two-week
highs versus the dollar on Thursday as its short-covering rally
ran out of steam and as worries about Spain's public finances and
banking system stopped it overcoming key resistance.
After failing to break above $1.2350-55 twice in the past 48
hours, the euro <EUR=> is at risk of retreat to around $1.2175, a
38.2 percent retracement of its rebound from a four-year low
below $1.19 set last week.
"Players think the euro's rise led by short-covering has come
to a near-term end," said an FX trader at a major Japanese
brokerage.
"We hear overseas investors with real money, such as pension
funds, are picking up the euro," the trader said. "But besides
them, there are few aggressive buyers of the euro, leaving the
single currency vulnerable."
Traders said the euro was likely to see selling into rallies
as tolerance for risk subsided on a revival in concerns about
euro zone fiscal problems.
"Some people want to reduce risk positions on worries about
Spain," said Daisuke Karakama, market economist at Mizuho
Corporate Bank.
But the euro's fall has not been as sharp as in May when
worries about the impact of Europe's fiscal problems drove it
down rapidly, and this indicated that although some shorts have
been covered, the market is still short euro longer term,
Karakama said.
"The euro would have been sold much more hysterically if it
were a month ago," he said.
It slipped 0.3 percent from late U.S. levels to $1.2268. It
is more than half a percent below the two-week high of $1.2354
hit on Wednesday but still up about 3 percent from the four-year
low of $1.1876.
The market will be watching a Spanish bond auction later in
the day after the spread of Spanish government bond yields over
benchmark Bunds soared to a euro lifetime high on Wednesday.
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"In the past few sessions, rises in the credit spreads of
euro zone countries have not led to euro selling as much as
before. But unless conditions in Europe improve, correlation
(between the euro and European bond spreads) will return," said
Junya Tanase, senior strategist at JPMorgan Chase Bank.
The European Union holds a summit on Thursday to discuss ways
to strengthen budget discipline and economic policy coordination.
The EU and IMF on Wednesday denied a report they and the U.S.
Treasury were drawing up a safety net for Spain. But worries
about Spanish banks put pressure on yields and the market will be
looking for the result of bank stress tests which the Spanish
central bank said would be published soon. []
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The euro also fell against sterling, the yen and the Swiss
franc. It shed 0.7 percent to 112.01 yen <EURJPY=R> as Japanese
banks sold. That helped push the dollar down 0.5 percent to 91.30
yen <JPY=>.
The dollar index <.DXY> <=USD> was up 0.3 percent at 86.37,
well above support near 85.85 which is the index's May 28 low.
The Australian dollar <AUD=D4> eased from one-month highs of
$0.8674. It was trading at $0.8593, down 0.4 percent, with some
players looking to sell into rallies after it failed to hold
gains above $0.8650.
The dollar was little changed on the day against the Swiss
franc <CHF=> at 1.1307 francs ahead of a Swiss National Bank
meeting.
The SNB is expected to keep interest rates low but may
announce measures to drain excess money from the economy after
flooding the market with francs since 2009 to keep the currency
from appreciating too rapidly. []
(Additional reporting by Reuters FX analyst Krishna Kumar in
Sydney and Rika Otsuka in Tokyo; Editing by Joseph Radford)
