(Reuters) - The euro tumbled to a 15-month low against the dollar and an 11-year low versus the yen on Thursday as concerns about euro zone sovereign funding pressures and signs of weakness in the region's banks prompted investors to sell the shared currency.
Hedge funds and macro funds shunned the euro despite solid demand at a French auction of long-dated government bonds, pushing it to $1.2825, its weakest since September 2010.
France sold nearly 8 billion euros in longer-dated government debt to investors who were attracted to the bonds' higher coupons following a rise in yields.
But analysts said upcoming Italian and Spanish government bond sales next week, seen as those countries' first major refinancing tests of the year, would be likely to keep the market on edge and the euro under pressure.
The euro's reaction to the French auction was a repeat of selling seen the previous day, when investors dumped the currency despite reasonable demand at an auction of German bonds. Analysts said this was a sign of strong negative sentiment towards the single currency.
It was the same reaction as the German auction yesterday ... People are just looking for an excuse to sell euro/dollar, after it rose on the first trading day of the year, said Adam Myers, currency strategist at Credit Agricole CIB.
Investors were also reluctant to buy the euro as a heavily discounted rights issue from Unicredit, Italy's largest bank, underscored funding problems in the euro zone's third largest economy.
Meanwhile, latest data from the European Central Bank suggested banks were hoarding cash rather than lending to each other despite the ECB providing almost half a trillion euros of ultra-cheap three-year loans last month.
Bank deposited 443 billion euros in the central bank's overnight deposit facility, down only marginally from the record 453 billion euros deposited the previous day.
Analysts said further signs of trouble in the banking sector could trigger more weakness in the shared currency.
If we get speculation in the next few weeks that we have an Italian or Spanish bank going under, that will cause a significant leg lower in the euro, Credit Agricole's Myers said.
SHORT SQUEEZE AHEAD?
Broad weakness in the euro also saw it fall to 98.56 yen , its lowest since 2000, while suffering against the Australian and Canadian dollars. The single currency is hovering within sight of its lowest level against a trade-weighted basket in 1-1/2 years, according to the European Central Bank's index.
The dollar rose 0.6 percent against a currency basket , with its index trading at 80.633. Sluggishness in the euro helped keep the U.S. currency near levels touched last week that are its strongest in roughly a year.
Data showed speculators cranked up bets to sell the single currency to their highest on record in the week ending Dec. 27. Some in the market said that has set up conditions for a possible short squeeze, where players pull back abruptly from those negative trades, although that shows no sign of materialising yet.
The indication is there will be a squeeze ahead and it will be pretty vicious but it could be when the euro is a lot lower than it is now. People don't seem to be fearful of selling the euro, said David Bloom, head of FX research at HSBC.
The euro traded at 1.2184 Swiss francs, little changed on the day.
Investors awaited a news conference later in the day from Swiss National Bank chief Philipp Hildebrand aimed at calming the furore over a dollar/franc trade his wife made shortly before the central bank imposed a strict cap on franc strength.
Analysts said drastic action by the SNB -- including the possibility of Hildebrand's resignation -- could trigger initial franc selling, but many expected any lasting impact to be limited as the issue was unlikely to change the central bank's policy of reining in the strong currency.
Market players were also looking ahead to U.S. jobs data, due at 1315 GMT. The ADP data is forecast to show 178,000 jobs added and signs that the U.S. economy is recovering could bolster risk appetite, potentially supporting the euro.