(Reuters) - The euro hit a one-week low versus the dollar on Tuesday on tensions in Europe's share and debt markets, and the yen hovered near a three-month low on expectations of more monetary easing in Japan. The euro fell 0.4 percent to $1.2998, with traders reporting selling by hedge funds after the currency broke below chart support at its 200-hour moving average of $1.3023. Spanish borrowing costs rose after Moody's cut the credit ratings of five of the country's regions. Falls in European equity markets due to concerns over earnings also dampened investor appetite for taking on risk and hurt the euro. But the currency held well within the $1.28 to $1.3170 range it has traded in since mid-September. "Moody's downgrade of five Spanish regions led to a hike in Spanish bond yields and the way the markets reacted to that saw the euro suffer," said Audrey Childe-Freeman, head of foreign exchange strategy at BMO Capital Markets in London. She said the downgrade was "not a game changer", though the market's focus remains on Spain, with the euro likely to stay in a range until the market had a clearer idea of when the country would apply for a bailout. "We are waiting for some signal that Spain will make a bailout request and the market needs that to break through the euro/dollar level of $1.3150. That will open the way for $1.3275, but we need a catalyst." The euro has strengthened recently on speculation that Spain will ask for aid, a move which would enable the European Central Bank to buy its bonds. But gains have been limited due to uncertainty over when Spain will act. Data showing French manufacturing sector morale at its lowest in two years also weighed on the euro. Initial readings of euro zone PMI data and a German Ifo business sentiment survey on Wednesday will be closely watched for signs of how well growth in the currency bloc is holding up. BOJ SPECULATION The yen remained vulnerable on expectations that the Bank of Japan will ease monetary policy at its October 30 meeting. The dollar was steady at 79.85 yen, having earlier hit a three-month high of 80.02 on trading platform EBS, its highest level since early July. The Japanese currency recovered came off its lows after Finance Minister Koriki Jojima denied a report that the government is asking the central bank to raise asset purchases by 20 trillion yen ($251 billion) to boost economic growth. The euro fell 0.5 percent to 103.82 yen, off an earlier five-and-a-half month high of 104.59 yen. "The market is a bit fixated on this meeting next Tuesday and no one wants to stand in front of a freight train," said Steven Saywell, head of FX strategy at BNP Paribas. "There's potential for disappointment. We are looking for opportunities to sell rather than chase the dollar higher." Elsewhere, the U.S. dollar rallied against the Canadian dollar on expectations the Bank of Canada will make no mention of eventual rate hikes in a statement at 1300 GMT following its policy meeting on Tuesday. The U.S. dollar rose 0.4 percent to hit a two-and-a-half-month high of C$0.9970.

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