* European currencies undermined by debt crisis contagion fear
* Dollar index near 7-week high, eyes 50 pct retracement
* Weak Ifo could spur fresh rounds of euro selling
* Swiss franc weakens after SNB warns on higher franc
By Hideyuki Sano
TOKYO, May 24 (Reuters) - The euro hovered above a two-month low against the dollar on Tuesday but is seen capped by worries that the euro zone's debt crisis could spread to heavyweights like Spain that had been considered safe from contagion.
Standard & Poor's cut its outlook for Italy to "negative" from "stable" on Saturday, while a crushing defeat for Spain's ruling socialists in local elections raised worries about Prime Minister Jose Luiz Rodrigo Zapatero's ability to meet fiscal targets. Madrid has been seen as an example of fiscal reform.
"The huge storm of risk reduction will rip through markets if the focus turns to Spain and Italy. It's clear they don't have money to bail out these countries," said Ayako Sera, a market economist at Sumitomo Trust and Banking.
"What we are seeing now could just be the beginning of it," she added.
But euro buying from Asian central banks as well as stable commodity and regional share prices helped stem the euro's decline in Asian trade, with some traders saying that in the near-term there might be a small rebound for the single currency.
The euro ticked up 0.15 percent in Asia to $1.4070
"The amount of euro selling in the past few days has been huge. So I suspect a lot of euro long positions have been cleared. Some may probably be caught in short positions," said a trader at a U.S. bank.
"I expect the euro to rebound in the near term, though I still think it's in a downtrend in the longer run," he said.
Some market players think worries about Spain and Italy may be overblown. The premium investors are demanding for holding Spanish and Italian bonds over German debt is still way below peaks hit late last year even though their credit spreads widened in the past week.
Still, the euro has also been suffering from a lack of consensus among European policymakers on how to deal with Greece, as many oppose the idea of debt restructuring while some market players think it is inevitable.
"The euro may not stop falling until European policymakers come up with a more reassuring stance on debt problems. Before that happens, the euro could fall to around $1.35," Sumitomo Trust's Sera said.
Its immediate resistance is seen at around $1.4070-80 and $1.4150.
The euro is also vulnerable to fear that investor disenchantment with riskier assets in the past month could continue as the U.S. Federal Reserve winds up quantitative easing, effectively ending its aggressive money-printing, in June. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ FX COLUMN-Euro breakdown paves way to $1.35 [ID:nL3E7GN0H4] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
As worries about the euro zone's debt problems spread,
other European currencies also came under pressure. The pound
slipped to an eight-week low of $1.6055
The dollar also gained 0.3 percent against the safe-haven
Swiss franc to 0.8860 franc
SWISSIE HURT
The Swiss currency was hurt by comments from Swiss National Bank Vice Chairman Thomas Jordan that he is "very worried" about the rise in the franc and that the bank will take action if deflationary pressure emerges as a result of a higher franc.[ID:nN23195284]
The New Zealand dollar gained after a quarterly survey on behalf of the Reserve Bank of New Zealand (RBNZ) showed inflation expectations in New Zealand rose in the second quarter.
The New Zealand dollar rose 0.7 percent to $0.7960
The dollar slipped a tad against the yen to 81.82 yen