The dollar rallied for a second straight day against the euro on Tuesday as new concerns about the funding needs of European banks offset stronger-than-expected German economic data.

The yuan declined against the dollar after China's weekend pledge to allow its currency to trade more freely.

Monday's upward momentum that helped stoke demand for higher-yielding currencies such as the Australian dollar faded as investors acknowledged that a more flexible yuan policy would not lead to a sharp appreciation in the Chinese currency.

Euro zone bank woes came to the fore after French bank Credit Agricole (CAGR.PA) pushed back profit targets for its struggling Greek unit Emporiki (CBGr.AT) on Tuesday and said it will take a 400 million euro ($536.7 million) write-down as Greece fights its debt load.

A ratings downgrade of French bank BNP Paribas by Fitch and S&P's announcement on Monday that it had raised estimates for loan losses for Spain's banking sector continued to weigh on the euro, analysts said.

The single currency extended losses after Moody's Investor Services downgraded two Greek government-sponsored asset-backed securities.

The Credit Agricole, BNP and Moody's news has all brought back into the limelight the likelihood of structural problems in the euro zone, said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange Inc in Washington, D.C. The impact from yesterday's China's news has definitely faded.

Midway through the New York session, the euro was down 0.2 percent at $1.2282, with a session low at $1.2251.

The single currency touched $1.2490 on electronic trading platform EBS on Monday, its strongest point since May 24, though it failed to break into the $1.25 region.

Market participants said the euro would face more losses, but technical analysts said near-term support was seen at $1.2253, a 38.2 percent Fibonacci retracement of the rise from a four-year low around $1.1875 on June 7 to Monday's high.

The euro barely reacted to the German Ifo business climate index, which hit a two-year peak in June, while the expectations index fell.

The positive surprise in the Ifo index failed to change the market's negative mood. The fact that the expectations component was downbeat did not help to support the single currency, analysts at Credit Agricole CIB said in a note.

The Swiss franc extended gains to an all-time high against the euro after the Swiss central bank's vice chairman said the bank would not intervene in markets for now.

The euro fell to a low of 1.3590 francs, according to Reuters data, with options barriers at both 1.3650 and 1.3600 giving way.

Against the yen, the euro fell 0.7 percent to 111.23 yen. The dollar fell 0.4 percent to 90.61 yen as the Japanese currency rose across the board.

CHINA IMPACT FADES

China's pledge to revalue its currency had less impact on markets on Tuesday.

It's indicative of the market sentiment out there that the Chian euphoria lasted all of 18 hours yesterday before we reverted to risk aversion, said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.

Market rumors of expected currency portfolio adjustment had little impact on trading. Investors would have to know the size of components in any official Chinese currency basket for indications as to how much they should buy and sell those components as the yuan revalues.

Trades would also have to be singularly large to drive exchange rates.

The yuan's daily mid-point was set at 6.7980 per dollar on Tuesday, the highest since its July 2005 revaluation, but the Chinese currency relinquished further gains as big, state-owned banks heavily bought dollars. Some traders believe the buying by state-owned banks was on behalf of the People's Bank of China to avoid direct market intervention.

Sterling fell to a session low against the dollar but then recovered as investors reacted positively to UK Finance Minister George Osborne's first budget.

(Reporting by Nick Olivari; Additional reporting by Steven C Johnson in New York, and Naomi Tajitsu and Tamawa Desai in London; Editing by Leslie Adler)

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