LONDON: The euro gave back some of the previous day's gains on Thursday, with persistent worries about the possibility of Spain applying for a full bailout leaving investors inclined to sell the currency on any rally.
The euro was down 0.2 per cent at $1.2130, edging away from a high of $1.21705 reached on Wednesday.
Analysts said the euro's falls may be limited before next week's U.S. Federal Reserve policy meeting due to speculation policymakers could hint at more monetary easing, but high Spanish borrowing costs were expected to keep investors wary of buying the currency.
"The only thing that could change the downtrend in the euro is if the Fed launched further quantitative easing or some other additional policy measures. Otherwise it's all about what happens in the euro zone," said Richard Falkenhall, currency strategist at SEB in Stockholm.
"Every time there is a rally in the euro like there was yesterday it should be used as an opportunity to sell into ... Long-term investors will take every opportunity to cut their euro exposure."
On Wednesday the euro recovered from this week's two-year low of $1.2042 after Austria's European Central Bank Governing Council member Ewald Nowotny discussed the merits of giving the euro zone bailout fund a banking licence.
Spanish 10-year government bond yields edged down to around 7.40 per cent but remained close to their euro era high of about 7.75 per cent and still at levels deemed unsustainable in the long term.
"I don't see the euro sustaining gains," said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong. "The fact is the ECB is still quite divided on the issue of giving the ESM a banking licence."
But with the euro having slid roughly 9 per cent from a peak hit in May, some traders said it may be due for a bounce.
The daily Ichimoku chart, a popular technical analysis tool, shows resistance for the euro near $1.2184, which is where the Ichimoku chart's tenkan line lies.
FED MEETING
The dollar index was up 0.1 per cent at 83.586, off a two-year high of 84.10, with investors slightly wary of buying before Wednesday's Fed policy decision.
"I think the dollar will find it difficult to make gains, given there is growing speculation that the Fed might take some action next week," said Credit Agricole's Kotecha.
The Fed's remaining policy tools include a third round of quantitative easing in the form of large-scale bond purchases - known as QE3 - and lowering the interest it pays banks on excess reserves they leave with the central bank.
Speculation the Fed may adopt monetary easing steps could strengthen if U.S. second-quarter gross domestic product data due on Friday is weak, although most expect the central bank to hold back for now.
The dollar held steady at 78.18 yen, hovering near a seven-week low of 77.94 yen set this week.
Traders said dollar demand for Japanese importers may help curb further falls. They also said a drop below 78.00 yen could heighten wariness about the possibility of Bank of Japan intervention to curb yen strength.
