The euro fell broadly on Monday, dropping to a two-month low against the dollar and the safe-haven yen and reaching a 1-1/2 year trough against the British pound, as Spain rekindled worries about the fragile state of the euro zone economy.

As Spanish 10-year government bond yields rose above 6 percent for the first time this year and the cost of insuring its debt hit a record high, sentiment was cautious across financial markets. That weighed on growth-linked currencies such as the Australian dollar while keeping the yen near a seven-week high against the U.S. dollar.

News over the weekend that China had doubled the yuan's daily trading band against the dollar to one percent has so far had limited impact on major currencies.

Spain's failure to convince investors that it can contain its budget deficit, along with recent losses in Spanish stocks .IBEX and the region's banking shares .SX7E as the effects of the European Central Bank's one-trillion-euro cash injection wane, drove investors to shun the common currency.

The euro fell below reported option barriers at $1.30 to $1.29945, its lowest in two months, as selling by some Asian investors picked up early in the European session. It was last trading at $1.3005 with more stops said to be below $1.2970.

Near-term support also lies around $1.2955, the 61.8 percent retracement of the euro's climb from a low of $1.2624 on January 13 to this year's high of $1.3487 struck on February 24.

Pressure is building up on the euro with concerns over Spain dominant, said Jane Foley, senior currency strategist at Rabobank. The focus will be on Spanish bond issuances this week and while the euro is holding around $1.30, the question is how long more can it be supported around these levels.

Spain will auction two-year and 10-year bonds on Thursday after selling short-dated bills on Tuesday. The sale will be a test of investor appetite after Spanish 10-year yields rose above 6 percent, inching towards the 7 percent mark that would be regarded as unsustainable if maintained for an extended period.

The jump in yields came after news that Spanish banks borrowed a record 316.3 billion euros ($412 billion) from the ECB in March, almost double the previous month's total, as they remained virtually shut out from wholesale credit markets.

The rapid erosion in investor confidence has put the spotlight on the ECB, which many expect to revive its purchases of peripheral bonds in the secondary market to stem a further rise in yields. Some also hope for a fresh infusion of cash.

ECB Governing Council member Klaas Knot said on Friday he did not expect the ECB to provide more cheap three-year money and hoped the bank never has to buy bonds again. However, Knot said the ECB could still support the bond market if needed.


In the options market, demand to protect against the euro's downside rose, with one-month euro/dollar risk reversals, an indication of investors' expectations for a currency to rise or fall, rising to 1.5 in favor of euro puts, or losses, from around 1.2 at the end of last week.

We maintain the view that the euro/dollar risks are skewed to the downside and that it will trade at $1.20 this summer, Chris Turner head of FX strategy at ING said in a note.

And over the coming months, we will probably look to cut our projections of a weak euro/dollar recovery into 2013.

The euro fell not just against the dollar, but across a wide range of currencies, highlighting its struggles as the euro zone sovereign debt crisis returns to the forefront of investors' concerns.

Against the yen, the euro fell to an eight-week low of 104.66 yen, while against sterling it fell to 82.10 pound, its lowest level since September 2010.

With appetite for riskier assets and currencies taking a breather, market players bought back the yen, driving down the dollar to a seven-week low of 80.442 yen. The dollar was last down 0.4 percent against the yen at 80.55 yen.

Commodity currencies were under pressure, getting little support from the Chinese move to widen the yuan's trading band. The Australian dollar fell 0.3 percent to $1.0340, while the New Zealand dollar was down 0.5 percent at $0.8176.

Some analysts said Beijing's weekend decision to allow more yuan flexibility could eventually be positive for risk sentiment, believing that Chinese authorities would not push ahead with such financial reforms if they were not confident of avoiding a hard economic landing.

In the end, it could have a limited impact as the move is unlikely to alter market views for a gradual yuan appreciation of around 2 to 3 percent this year. In fact the yuan weakened on the first day of trading after the wider band was adopted.