* Japan will use existing euro reserves to buy EFSF bonds
* Debt auctions in Portugal, Italy, Spain in focus
* Euro weakness to resume, seen sliding toward $1.2590 (Updates with euro reversing gains)
By Wanfeng Zhou
NEW YORK, Jan 11 (Reuters) - The euro slipped against the dollar on Tuesday with more losses expected after a pledge by Japan to buy euro zone bonds failed to calm fears of a sovereign debt crisis spreading to Portugal and Spain.
The euro had earlier climbed near $1.30 after Japan said it will purchase euro zone bonds to bolster confidence in the European Financial Stability Facility (EFSF), but gains faded after Tokyo said it would use existing euro reserves to pay for the debt. For more, see [ID:nLDE70A06M]
A critical test for the euro will come on Wednesday when Portugal is scheduled to sell up to 1.25 billion euros of bonds in an auction that will signal whether the indebted country will be able to afford to raise funds in the debt market or be forced to take a bailout.
"The support (from Japan) looks set to come from existing euro reserves, so it will not form an increase in the allocation of the euro," said Mary Nicola, currency strategist at BNP Paribas in New York. "In fact, if it's a reallocation away from the peripheral bond markets to the EFSF bonds, then it could prove to be euro negative.
"We are expecting to retest yesterday's $1.2875 low, and a break below here could trigger a further euro/dollar decline toward $1.2645 and $1.2590 in the coming weeks," she added.
Tokyo's pledge came after China assured Spain it would invest in the indebted euro zone state's bonds -- an assurance whose impact also proved fleeting.
The euro last traded down 0.2 percent at $1.2917 EUR=, having risen as high as $1.2992 on trading platform EBS.
Resistance is at its 200-day moving average of $1.3072 while support is around $1.2794, the 61.8 Fibonacci percent retracement of a June-to-November rally.
The euro rose 0.4 percent to 107.51 yen EURJPY=R from a four-month low of 106.75 yen set on Monday. It gained 0.6 percent to 1.2607 Swiss francs EURCHF=R.
AUCTIONS IN FOCUS
The euro could easily resume its downward path given mounting unease over a heavy schedule of debt issuance by southern European countries this week, analysts said.
Markets have already pushed the 10-year Portuguese yield to punishingly high levels above 7 percent PT10YT=TWEB.
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