SINGAPORE - The euro hit a two-year low on Friday and was seen at risk of falling further in coming weeks, dogged by worries that Spain may need external aid to shore up its struggling banking sector and fix its public finances.

The euro's sell-off has gained steam this week as Spain's borrowing costs surged on worries it may need to issue more debt to recapitalise its banks, adding stress to markets frayed by anxiety that Greece may exit the euro zone.

The heightened worries about Spain have been highlighted by a widening in the yield spread between Spanish 10-year government bonds and German Bunds to euro-era highs this week, and the euro has fallen almost in lock step with that move.

The euro slipped 0.2 per cent to US$1.2337 (S$1.5).

It fell to as low as US$1.2324 on trading platform EBS at one point, its lowest level since July 2010.

"We're looking for US$1.18 by the end of Q3, and at this rate, it could happen before that," said Callum Henderson, global head of FX research for Standard Chartered Bank in Singapore.

"During this risk-off environment, the US dollar is the only place to be," he added.

Both the euro and the Australian dollar dipped against the US currency after data provided fresh evidence of a slowdown in China's economy.

The Australian dollar fell 0.5 per cent to US$0.9673 and touched an eight-month low of US$0.9648 at one point after China's official purchasing managers' index (PMI) fell to 50.4 in May.

That was the weakest reading this year and was also below the market's expectations.

Risk aversion on the worries about Europe, coupled with concerns about a slowdown in China - Australia's main export market - have weighed on the Australian dollar over the past month.