Sweden's krona in focus on lackluster outlook for euro zone By William L. Watts, MarketWatch LONDON (MarketWatch) -- The dollar fell against the euro and Japan's yen Thursday, with the European single currency gaining ground after Spain managed to sell out 3.5 billion euros ($4.3 billion) of five-year bonds. The bond auction came a day after Moody's Investors Service placed the nation's Aaa sovereign credit rating under review for possible downgrade. The Spanish auction saw the government sell the maximum amount on offer. Bids received exceeded supply 1.7 times, a ratio down from 2.35 times in a May 6 bond auction. The average yield rose to 3.657%, up from 3.532% at the May auction. Read about the auction results. The dollar index (DXY 85.52, -0.50, -0.58%) , a measure of the greenback against a trade-weighted basket of six major currencies, fell to 85.523 from 86.012 late Wednesday. The euro (CUR_EURUSD 1.2328, +0.0095, +0.7766%) traded at $1.2334 in recent action, up from $1.2247 in North American trading late Wednesday. Boris Schlossberg, director of currency research at GFT, noted a "sharp short-covering rally ... that took the pair through the $1.2300 handle" as foreign-exchange traders reacted with relief to the auction. The single currency temporarily edged back below the $1.23 level after the European Central Bank said it allotted €111.2 billion ($135.9 billion) in six-day loans at the benchmark rate of 1%. The operation came on the same day that banks must repay €442 billion in one-year loans. Analysts said strong participation in the short-term tender muted support for the euro somewhat, although overall demand for loans in the six-day operation and in Wednesday's three-month tender came in below expectations. Still, concerns remain about funding pressures for European banks. Meanwhile, traders focused on the Swedish krona in light of the decision Thursday by Sweden's central bank to hike its key lending rate to 0.5%, up from 0.25% previously. The euro sold for 9.5876 krone, a gain of 0.7%, but the Swedish currency (CUR_USDSEK 7.7772, -0.0036, -0.0463%) gained 0.1% to trade at 7.7790 per dollar. The Riksbank also offered a gloomy assessment of Sweden's economic prospects. While the economy is developing "strongly," the Riksbank said it won't be hiking rates as "rapidly as we previously assumed" due to expectations that the 16-nation euro zone -- Sweden's main trading partner -- will take a hit as a result of budgetary belt-tightening. Read about the Riksbank decision. The British pound (CUR_GBPUSD 1.4990, +0.0046, +0.3078%) fell slightly to change hands at $1.4954, compared to $1.4961. A purchasing managers index for Britain's manufacturing sector showed activity continued to grow at a fast pace in June, although it slowed from the 15-year peak seen in May. Read about the PMI data. In Asian trading, the dollar slipped to a two-month low against the yen (CUR_USDYEN 87.6500, -0.7100, -0.8035%) , standing at ¥88.08 from ¥88.48 in North American trading late Wednesday, as a regional stock selloff sent risk-averse investors scurrying into the lower-yielding unit. The yen benefited from a stronger-than-expected headline figure in the Bank of Japan's quarterly tankan survey of business sentiment. The diffusion index for large manufacturers improved to a positive reading of 1, beating the forecast of minus 4 predicted by economists surveyed by Dow Jones Newswires, and rising from minus 14 in the March survey. See full story on tankan. But sentiment in stock markets across the region got undercut by disappointing Chinese manufacturing data, which indicated a slowdown in growth for the regional powerhouse. See full story on China PMI data.

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