NEW YORK (Reuters) - The euro declined for a fifth straight session against the dollar and yen on Tuesday as weak euro zone data and a ratings watch on the region's strongest economies further dimmed the outlook for the common currency.
Germany's purchasing managers index showed both the manufacturing and services sector shrinking more than expected in July, while the equivalent French manufacturing survey was also well below forecasts.
The data came a day after Moody's changed its outlook for Germany, the Netherlands and Luxembourg to negative, warning that Europe's top-rated countries may have to increase support for indebted states such as Spain and Italy.
"The global economy is shrinking and the purchasing managers index is very much a sentiment index," said Tommy Molloy, chief dealer, at FX Solutions in Ridgewood, New Jersey. "It can't be a surprise that PMI numbers in the euro zone, or anywhere in the euro zone, are ugly even if that country happens to be the strongest member."
What concerned Molloy more was the ratings watch on the euro zone's supposedly healthiest economies, noting that the implications are fairly dire.
"It is underlining the fact that whatever resolution for Europe -- whether Greece exits or stays in the euro zone, giving up sovereignty, but facing the prospect of being eternally bailed out, will ultimately undermine the stronger members of the euro zone," Molloy said.
Other analysts said worries that more Spanish regions will follow Valencia and request financial aid from Madrid would keep Spanish bond yields high and encourage investors to sell the euro.
Spain was forced to pay higher yields on short-term debt at a sale on Tuesday while Spanish borrowing costs remained at levels which analysts say are unsustainable in the long term.
The euro was at $1.2097, down 0.1 percent on the day, and not far from a two-year low of $1.2067 touched on Monday as concerns about Spain's debt problems intensified. Current trading volume on euro/dollar on Reuters Dealing was $3.3 billion.
The euro zone's common currency got only a brief lift earlier after data showed China's manufacturing output grew at its fastest pace in nine months, with the overall trend for the currency remaining negative and global growth worries still intact.
Traders said the euro had support at an options barrier at $1.2050 and below that at the psychological level of $1.2000. Below there the next target would be the 2010 low at $1.1876.
PMI data showed private sector activity in the euro zone as a whole shrank for a sixth successive month, which data collector Markit said was consistent with a quarterly GDP fall of 0.6 percent.
"The PMI numbers were weak as expected, and the risk is that the ECB (European Central Bank) will potentially ease more," said George Saravelos, FX strategist at Deutsche Bank.
A rate cut or cash injection from the ECB could give investors even less incentive to hold the euro.
Since the ECB cut interest rates earlier this month the euro has fallen heavily against a range of currencies, including those which usually fall in times of heightened risk aversion.
It traded at A$1.1749 against the Australian dollar, near Monday's record low of A$1.1690, and at C$1.2299 versus the Canadian dollar, also near a record low.
The euro fell 0.3 percent against the safe-haven yen to 94.65 yen, holding above Monday's low of 94.23 yen, its lowest in nearly 12 years.
The near-term outlook for the euro and riskier currencies will also be influenced by the outcome of a visit to Athens by inspectors from the troika of international lenders whose bailout loans are keeping Greece from going bust.
However, analysts said poor U.S. data may slow the euro's decline against the dollar even as it falls against other currencies. Figures on Friday are expected to show growth slowing in the world's largest economy.
The dollar index .DXY, which measures its value against a basket of currencies was up nearly 0.1 percent 83.755, below Monday's two-year high of 83.999.
Additional reporting by Jessica Mortimer in London; Editing by James Dalgleish