NEW YORK, June 18 (Reuters) - The euro held near a three-week high against the dollar on Friday, heading for its biggest weekly gain in more than a year as investors debated the single currency's outlook while awaiting results of European bank stress tests.
The euro steadied just below $1.24 after a solid Spanish government bond auction on Thursday eased concerns about the country's public finances and investors unwound large short positions accumulated during the currency's sell-off in recent months.
The dollar slipped against the Japanese yen after disappointing U.S. economic data this week prompted investors to scale back expectations of a U.S. Federal Reserve interest rate rise.
We had some nice euro gains and dollar weakness over the course of this week. We're going to see whether the euro is going to sustain these gains and press on toward $1.25, said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey.
But if we see a move back below $1.2340/50, it looks like we might see some end-of-week profit-taking and selling of euros, he added.
In midday New York trading, the euro was at $1.2366 EUR=, down 0.1 percent on the day, after rising to a three-week high of $1.2417 on electronic trading platform EBS.
The euro EUR=EBS has rebounded about 2 percent against the dollar this week, the biggest weekly rise since May 2009, pulling the currency further away from its four-year low of $1.1876 struck on EBS on June 7.
Against the yen, the dollar dipped to a three-week low at 90.45 yen JPY= and was last at 90.78 yen, down 0.2 percent.
The Swiss franc gained after Switzerland's central bank on Thursday backed away from its pledge to fight excessive currency strength and said that for now, deflation risks have receded. [ID:nLDE65E1W2]
The euro slid to a record low EURCHF= at 1.3718 Swiss francs, according to Reuters data, while the dollar hit a one-month low of 1.1081 francs CHF=.
REBOUND FACES STRESS TEST RESULTS
The euro remains upside corrective and on track to test the $1.2445 2009 low and inter-year pivot, technical analysts at Commerzbank said.
A continuation of this rally, however, seems subject to the results of the stress tests for European banks.
European leaders agreed on Thursday to publish details of stress tests showing the financial health of big banks next month. Some in the market said the release of stress tests would boost trust in European banks but others were concerned they could reveal fragility in the sector and hurt the euro.
They could be quite significant if they in fact show that significant capital needs to be raised by some of the major European banks, Forex.com's Dolan said. The euro zone is by no means out of the woods.
Analysts at BNP Paribas see the euro's corrective rebound running out of steam at around $1.2525, saying flows data suggest the current rebound is not backed by real money investment flows.
The dollar index .DXY was flat at 85.737, after falling to a one-month low at 85.453. Technical analysts said it looked vulnerable after breaking through support at 85.85, with the next key level seen in the 85.13 area, its May 21 low.
The Chinese yuan rose to a one-month high against the U.S. dollar in offshore forwards as investors bet China may eventually cave in to growing pressure from U.S. Congress to let the yuan rise in value.
Benchmark one-year non-deliverable forwards CNY1YNDFOR= fell as far 6.6780. That implied investors were betting on a 2.2 percent rise in the yuan against the U.S. dollar over the next year, up from bets of a 1.3 percent gain on Thursday. (Additional reporting by Tamawa Desai in London; Editing by Leslie Adler)