LONDON (Reuters) - The euro eased against the dollar on Monday on concerns about euro zone debt and high peripheral bond yields though its falls were tempered before testimony this week by U.S. Federal Reserve Chairman Ben Bernanke, who may hint at more monetary stimulus.
The euro also fell to a 3 1/2-year low against sterling after a report suggesting a change in the ECB's stance on how some bondholders could be treated under Spain's bank bailout.
The Wall Street Journal said European Central Bank President Mario Draghi advocated imposing losses on holders of senior bonds issued by the worst hit Spanish savings banks.
The ECB declined to comment on the report, which said finance ministers rejected the advice due to concerns financial markets would react badly to such a decision.
"The euro is likely to remain on the defensive ... If this report gains credibility that would be another reason to play the euro from the short side," said Jeremy Stretch, currency strategist at CIBC.
The euro was down 0.2 percent at $1.2223, with most analysts and traders expecting it to retest last week's two-year low of $1.2162 before falling further towards $1.20.
It fell to 78.55 pence against sterling, its weakest since late 2008.
But analysts said euro losses against the dollar could be tempered if Bernanke hints in testimony on Tuesday and Wednesday at the possibility of more quantitative easing to boost the U.S. economy.
Any such clue would weigh on the dollar, which fell to a near four-week low against the Japanese yen of 78.97 yen, dropping below chart support at its 200-day moving average around 79.04 yen.
"It would be prudent to lighten positions just in case Bernanke does make reference to more QE," Stretch said, adding the dollar would see a relief rally if he did not.
The Fed last month expanded efforts to keep long-term interest rates low by saying t would buy an additional $267 billion in long-dated bonds while selling short-term securities.
The central bank, however, held off from launching a third round of outright bond purchases that would expand its balance sheet, a form of stimulus known as quantitative easing.
"I think he certainly will keep the door open. But I don't think that he will indicate the Fed are any more closer to QE than they were at the last FOMC meeting," said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong.
EURO WORRIES
German bond prices built on last week's gains on Monday as euro zone debt worries supported flows into the region's top-rated, highly liquid bonds and investors fled bonds of indebted peripheral euro zone countries.
Spanish and Italian bond yields remained elevated as market confidence that the countries can finance their debts while reining in deficits ebbed.
Market players were cautious before a vote by the German lower house Bundestag on Spanish bank aid set for Thursday. German Chancellor Angela Merkel said on Sunday she was confident of backing from a majority of lawmakers.
A German Constitutional Court decision on the permanent euro zone bailout scheme and the fiscal pact for budget discipline, which is now not expected until September 12, could also weigh on the euro in coming weeks.
The euro was down 0.4 percent against the safe-haven yen at 96.63 yen.
