The yen also ceded ground against the dollar on speculation the Bank of Japan might loosen policy after the US Federal Reserve launched a fresh round of monetary stimulus last week.
Market players said rising bond yields in Spain, which hovered around 6 percent on 10-year debt, also weighed on market sentiment and added to pressure on the euro.
“If Spain steps forward (to ask for a bailout) and all of us get some clarity it would remove an element of uncertainty,” said Derek Halpenny, European head of FX research in London.
“The longer we remain in this scenario the more likelihood is investor confidence will ebb away.”
The single currency fell 0.5 percent to $1.3054, having hit $1.3173 hit on Monday, its highest since May 4. Traders said option barriers at $1.3200 appeared safe for now.
The euro has rallied about 9 percent from a two-year low of $1.2042 in July when investors were worried the currency bloc might be heading for a break-up as Spanish and Italian borrowing costs soared.
Optimism the European Central Bank’s new bond buying scheme will help Madrid weather the debt crisis helped lift the euro, although uncertainty over whether Spain will seek a bailout tempered recent positive sentiment.
In a television interview on Tuesday, Spain’s Deputy Prime Minister said the country was still considering the conditions of a possible bailout.
A slightly better-than-expected German analyst and investor sentiment survey that rose in September after four months of decline, failed to lift the single currency.
The euro also fell 0.5 percent against the yen to trade at 102.69 yen, having rallied to a four-month high of 103.858 yen on Monday.
The dollar traded at 78.61 yen, having risen as high as 78.93 yen on Monday on buying by speculative accounts such as hedge funds, traders said. It hit a seven-month low of 77.13 yen just last Thursday.
“There are quite a lot of expectations about the BOJ’s easing priced in now. The dollar/yen is unlikely to fall much ahead of the outcome of the BOJ’s policy meeting,” said a senior trader at a European bank, referring to the bank’s two-day meeting that started on Tuesday.
The Fed’s announcement last week of a new asset-buying programme has led to speculation the BOJ might also ease policy to prevent the yen from strengthening.
“We expect the Bank of Japan to increase its asset buying fund by five trillion yen ($63 billion). If it does, the dollar might have a chance to break resistance around 79.50 yen. Alternatively, if it doesn’t, the dollar will fall below 78 yen,” said Osamu Takashima, chief Japan FX strategist at Citibank.
A rise in US bond yields after the Fed’s action also supported the dollar. The 10-year yield stood near a four-month high of 1.89 percent hit on Friday.
Dollar/yen has traditionally been highly correlated with US yields, partly based on the perception that they should attract more dollar-buying by Japanese investors.
The Australian dollar traded at $1.0421, pressured by worries that slower growth in China would put the brakes on Australia’s mining boom.
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