July 25, 2012 / 3:00 AM / 5 years ago

FOREX-Euro hovers near 2-year lows as Spanish worries unabated

* Euro zone debt crisis still weighing on risk appetite

* Talk of Fed moving closer to QE3 overshadowed for now

* Aussie CPI in line, little impact on market

By Antoni Slodkowski

TOKYO, July 25 (Reuters) - The euro was stuck near two-year lows on Wednesday in Asia as investors gave it and risk currencies a wide berth after a sell-off in global stocks amid mounting fears debt-ridden Spain might need a bailout.

Rising Spanish borrowing costs are fuelling fears for the region's stability and European Union officials said Greece had little hope of meeting the terms of its bailout.

This saw the euro, which slumped to a fresh two-year low around $1.2042 the previous session, hover at $1.2052. It remained firmly on track to test the 2010 nadir of $1.1876, analysts said.

"Borrowing costs in Spain have already reached unsustainable levels and the price action in the euro suggests that investors believe it should only be a matter of time before there is a need for a sovereign bailout," said Kathy Lien, managing director of FX strategy for BK Asset Management.

Against the yen, the single currency fetched 94.36 , having carved out a new 12-year low of 94.12. The euro, though, managed to recoup lost ground against high-beta currencies like the Australian dollar. It was last at A$1.1810 , recovering from a dip to A$1.1729.

Traders in Tokyo cited talk of a euro/yen option barrier at 94.00 and stop-loss offers under the level.

Markets reacted cautiously to a Wall Street Journal article saying U.S. Federal Reserve officials were moving closer to taking new steps to spur activity and hiring.

"This is in line with our economist's expectations and we expect that the market moving towards this view to lead to a reversal of the USD's recent rally," BNP Paribas analysts wrote in a client note.

They said based on their fair-value models, the euro looked substantially undervalued across the board following its underperformance in recent weeks.

"We recommend going long EURUSD, targeting a return to fair value of 1.2420 with the stop loss at 1.1870, slightly below the 5 year low of 1.1877," they added.

Spain paid the second highest yield on short-term debt since the birth of the euro at an auction of three- and six-month bills on Tuesday, indicating difficulties in future debt sales.

Delivering yet more bad news for Europe, Moody's changed the outlook on its provisional top-notch rating for the European bailout fund to negative. The action was expected given its move earlier in the week to slap a negative outlook on Germany, the Netherlands and Luxembourg.

"Both the Moody's action and the Spanish woes have been known for months, so with the market so short euros, there's a chance of a short-covering bout in the euro," said Teppei Ino, currency analyst at the Bank of Tokyo-Mitsubishi UFJ in Tokyo.

In data collated to July 17, speculators had increased bets against the euro. Changes in speculative positions after Valencia, Spain's most indebted region alongside Catalonia, sought help under an 18-billion-euro program, will only appear in data collated through July 24.

With the euro on the backfoot, the dollar index remained near a two-year peak of 84.100 set the day before. Against the yen, the greenback traded at 78.17, holding above a 7-week trough around 77.94 set early in the week.

The broadly firmer greenback saw the Australian dollar retreat to a 1-1/2 week low of $1.0211, before it steadied around $1.0225. It was not far from the lower-end of its uptrend channel drawn from the June 1 low and the 100-day moving average at $1.0195.

The Aussie ignored consumer inflation data which came broadly in line with markets expectations. (Additional reporting by Masayuki Kitano and Ian Chua; Editing by Michael Perry)

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