The continued standoff between Spain and its euro-zone partners extended the euro's pullback from the previous day's four-month highs in European trading Tuesday, although the selling was kept in check after a smooth auction of short-term Spanish government debt.
The euro briefly slipped below $1.3150 against the dollar and traded near Y102.50 against the yen, having strengthened Monday to as high as $1.3173 and Y103.85, respectively.
The slide in the single European currency occurred as yields on 10-year Spanish government bonds momentarily rose back above 6% for the first time since Sept. 6, when the European Central Bank first outlined its plan to buy some of the debt of fiscally frail euro-zone countries, such as Spain, as long as they committed to a program of reforms and budgetary targets.
Spain has so far resisted calls for it to formally request external help, despite widespread expectations that it will eventually be forced to, and that is helping to cap the euro after an sizzling run of gains.
"Spain's reluctance to tap the European Stability Mechanism has brought the recent euphoria back to ground," said Peter Kinsella, currency strategist at Commerzbank.
"However the Spanish will have to go sooner or later. The timing depends on the movement of Spanish bond yields. The higher the yields, the sooner they will be knocking on the ESM's door," Kinsella said.
Data Tuesday showed that bad debts held by Spanish banks rose to a record 9.9% of all outstanding credit, underlying the growing economic challenges faced by the country, but news Spain sold slightly more Treasury bills than planned at a cheaper rate than at previous auctions came as a welcome reprieve for currency markets.
Also helping provide a floor for the euro was news economic expectations in Germany, Europe's largest economy, rose for the first time in five months, signaling that the anticipated economic weakness in the country is likely to prove moderate.
But the overall mood was cautious as traders awaited the next signal from the euro zone, which dragged on emerging market currencies.
The Turkish lira was steady after the country's central bank cut its overnight lending rate to 10.0% from 11.5%, while keeping its borrowing rate unchanged at 5%.
At 1042 GMT, the euro was trading at $1.3064, compared with $1.3117 late Monday in New York. The dollar traded at Y78.63 from Y78.71. Sterling was trading at $1.6250, compared with $1.6243.
The Wall Street Journal Dollar Index, which measures the dollar against a basket of currencies, was at 69.248 from 69.110.
A summary of key levels for chart watching technical strategists is below:
