5 Min Read
* Spanish 10-yr yield hits new euro-era high at 7.3 pct
* Focus on Spanish yields ahead of debt sale around 0840 GMT
* Some chance euro rise on short-covering ahead of Fed
* G20 draft communique urges bold action from Europe
* RBA statement has little impact on Aussie
By Antoni Slodkowski
TOKYO, June 19 (Reuters) - The euro on Tuesday recouped some losses sustained after Spain's borrowing costs spiked to euro-era highs on worries over its banks, but gains were poised to stay capped ahead of a debt sale likely to see Madrid's borrowing rates rise even more.
Markets cut short the honeymoon after a pro-bailout vote in Greece, pushing Spain's bond yields to 7.3 percent, undermining Madrid's ability to finance itself less than two weeks after the EU decided to lend it 100 billion euro to boost its lenders.
Against this backdrop, the world's major economies were set to urge Europe to take "all necessary policy measures" to resolve its debt crisis and U.S. President Barack Obama requested a meeting with its leaders.
"The jump in Spanish borrowing costs shows very clearly that global leaders are running out of time to find the solution to the euro zone crisis," said Michiyoshi Kato, senior vice president of forex sales at Mizuho Corporate Bank in Tokyo.
"The situation is quite obvious. If they can't come up with a viable solution soon, the European crisis will morph into a global one and the euro would slowly head towards parity against the dollar," he said.
The euro stood at $1.2603, having tumbled from a one-month high of $1.2748 in its worst showing in nearly three weeks. It hit the peak after parties supporting Greece's international bailout gained enough votes to form a ruling coalition in Athens.
"Worries over Spain have been around for the last three-four weeks. Greek elections helped us avoid a bigger catastrophe, but they couldn't do anything about the Spanish woes," said Teppei Ino, currency analyst at the Bank of Tokyo-Mitsubishi UFJ.
Spain, the euro zone's fourth-largest economy and more than twice the size of bailed-out euro zone partners Greece, Portugal and Ireland combined, is at the centre of a market storm as it struggles with a deep recession and bank sector restructuring.
The country is likely to pay record high borrowing rates at debt auctions this week. Spain's Treasury will issue 2 billion to 3 billion euros ($2.52 billion-$3.79 billion) of 12- and 18-month debt on Tuesday and between 1 billion and 2 billion euros of bonds due in 2014, 2015 and 2017 on Thursday.
Still, the euro's crucial support levels at 1.2536 at the trendline drawn below daily lows from June 1, together with the 21-day moving average at 1.2529 held, as many traders thought it may rise versus the dollar on easing by the Federal Reserve.
Bank of Tokyo-Mitsubishi's Ino, in line with market consensus, expects the U.S. central bank to extend its long-term bond-buying through Operation Twist by a few months from the current deadline of June after a series of disappointing data.
"I think we won't see a full-fledged QE 3, but an extension of Operation Twist is likely. No action from the bank would have the euro go back towards its low of June 1," Ino said.
The euro's recovery from its two-year low on June 1 has been driven by a broad weakness in the U.S. dollar based on speculation about more Fed easing.
Citigroup analysts also expect a modest extension of Operation Twist by $200 billion.
Against the yen the euro stood at 99.54 yen. Versus the dollar, the yen was 0.2 percent higher at 78.97 on the back of buying from Tokyo exporters, traders said.
With the euro making modest gains, the dollar index - the gauge of the greenback's performance against a basket of major currencies - dropped 0.2 percent to 81.797 after hitting a one-month low of 81.266 the day before.
The risk-prone Australian dollar was barely changed at $1.0130, below a 5-1/2-week high of 1.0143. Support was seen around 1.0110 and 1.0060 with resistance at 1.0145.
Australia's central bank said its decision to cut interest rates this month was "finely balanced", but the growing threat from Europe and tame inflation at home meant monetary policy could be a little more supportive. (Editing by Jacqueline Wong)