SYDNEY (Reuters) - The euro wallowed at two-week lows on Thursday, having suffered a third day of decline as violent protests against austerity measures in the streets of Madrid and Athens highlighted the challenges facing highly-indebted euro zone countries.
The single currency stood at $1.2870, after touching a low of $1.2835. Traders said bids around the 200-day moving average at $1.2827 helped stem the slide. Stronger support is seen at $1.2739, the 38.2 percent retracement of the July to September rally.
Traders also said Spain's reluctance to request for a bailout and trigger the European Central Bank's new bond-buying program has dampened sentiment. Investors sold Spanish and Italian bonds on Wednesday, causing their yields jump.
"Protests in Madrid and Athens coupled with the announcement that Spain will miss its public deficit target of 6.3 percent of GDP this year brought euro zone stress back to the fore," analysts at BNP Paribas wrote in a client note.
"Spanish 10-year yields rose back up to 6 percent for the first time since early September. Spain will be the focal point of the markets today as Prime Minister Rajoy presents his economic reforms and 2013 budget."
Analysts said the backup in yields could be a mixed blessing for Italy, which is looking to sell up to 7 billion euros of debt later in the day. The higher yield may boost appetite, although market volatility could just as well keep many investors away.
Still, investors were wary of getting too bearish on the euro given that Spain could ask for aid at any time. As well, nobody wanted to stock up on the U.S. dollar as the Federal Reserve is running its own stimulus program.
That confluence of factors saw the common currency down just 2.2 percent from a peak of $1.3173 set on September 17, only a small correction that could yet turn full-scale if sentiment continued to sour, traders warned.
At the back of the market's mind is Moody's review on Spain's ratings expected this week. A possible sovereign rating cut could take the country below investment grade and add further pressure on policymakers.
The setback in the euro saw the dollar index .DXY pop up to a two-week high of 80.012. However, it remained within easy reach of a six-month trough of 78.601 plumbed on September 14, just after the Fed unveiled its new asset-buying program.
To the frustration of Japanese authorities, investors once again sought safety in the yen, driving it to two-week highs against both the dollar and euro.
The dollar slid to 77.59 yen, before regaining a bit of ground to last stand at 77.70, while the euro fell as far as 99.71.
A stronger currency is a drag for the struggling export-reliant economy and Bank of Japan board member, Takehiro Sato, told Reuters on Wednesday the bank is ready to add more stimulus and may ponder new steps if necessary.
Among commodity currencies, the Australian dollar continued to flounder thanks to the added worry of China's economic slowdown. China is Australia's top export market and the world's biggest consumer of commodities such as iron ore.
Given a lack of policy response from Chinese officials, who are undertaking a once-in-a-decade leadership transition, a growing number of analysts now expect the Reserve Bank of Australia to cut interest rates as early as next week.
The Aussie last traded at $1.0371, having sunk as far as $1.0331. It has lost about 2-1/2 cents since reaching a six-month high of $1.0625 earlier in the month.
Investors will get another reading on China's manufacturing sector from HSBC on Saturday, ahead of a week-long holiday in the world's second biggest economy.
Editing by Wayne Cole