TOKYO, June 18 (Reuters) - The euro held at three-week highs on Friday, on track for its second straight week of gains, while the dollar appeared vulnerable to further losses after falling below a key chart level.

The euro retained gains near $1.24 as investors liquidated short positions after solid demand at Spanish bond auctions, which also encouraged some investors to shift funds back to euro zone bonds from safe-haven U.S. Treasuries, traders said.

Peripheral European debt markets calmed after the auction, whetting investors' appetite for riskier assets and supporting higher-yielding currencies like the Australian AUD=D4 and New Zealand dollars NZD=D4 which touched one-month highs.

While the news flow out of Europe started the week negative, a good Spanish bond auction overnight and the potential for a coordinated bank stress test across the euro area ... has bolstered investor confidence that European officials are beginning to get things right, Barclays Capital said in a note to clients.

The euro EUR= rose as far as $1.2414, a three-week peak, and held at $1.2400 after gaining 0.6 percent on Thursday.

It has advanced more than 2 percent so far this week, overcoming a Moody's downgrade of Greece's credit rating to junk status and pulling further away from a four-year low of $1.1876 struck on June 7.

Traders said there were some light stops lined up above the day's high, with near-term resistance at $1.2457, the single currency's 2009 low hit during the global financial crisis.

The spread between Spanish government bond yields and benchmark German Bunds narrowed from a euro lifetime high after Thursday's auction.

The euro was also being helped by broad dollar weakness after a rise in jobless claims and weaker-than-expected manufacturing data on Thursday prompted investors to scale back expectations of a rate hike by the Federal Reserve.

I still think the euro is a sell into rallies and I expect it to see resistance at $1.25, said Gregg Gibbs, currency strategist at RBS, Sydney.

European leaders agreed on Thursday to publish details of stress tests showing the financial health of individual banks next month and to toughen budget rules to restore confidence in their currency union.

Some market players believed the release of stress tests would boost investor trust in European banks, but others were concerned they could reveal fragility in the sector and hurt the euro.

The dollar index .DXY was at 85.57, down 0.1 percent after brushing a one-month low at 85.491. Technically it looked vulnerable to a further fall after it broke through support at 85.85, with traders and analysts citing the 85.13 area -- its May 21 low -- after a bearish reversal in the previous session.

If that level goes, then you'll probably see a bit more capitulation (from dollar longs) on that front, said Sue Trinh, senior currency strategist at Royal Bank of Canada in Hong Kong.

The dollar was marginally lower at 90.88 yen, having fallen 0.5 percent in the previous session after the weaker-than-expected U.S. data.

Trinh said there was some talk of stop-loss sell orders below 90.75 yen.

The Japanese government in its economic growth strategy called on the Bank of Japan to do its utmost to beat deflation and said fiscal and monetary policies for ending price falls should help the country avoid excessive rises in the yen.

Analysts said the wording on the forex policy may have sounded less aggressive than expected for some market players who had expectations for drastic steps to weaken the yen, helping the yen's rise. But the overall reaction was limited, traders said.

The Swiss franc CHF= was also firm, having rallied after Switzerland's central bank backed off its pledge to fight excessive currency strength now that deflation risks have receded. For details, see

The dollar held at 1.1114 francs after revisiting a one-month low of 1.1095. The euro was slightly lower EURCHF= at 1.3775 francs, not far from a record low of 1.3735 on EBS hit on June 9.

Meanwhile, the Australian dollar was up 0.2 percent at $0.8693 AUD=D4, after touching a one-month high at $0.8714, boosted by better risk appetite. The NZ dollar likewise was holding just below a one-month high of $0.7068. (Additional reporting by Anirban Nag in Sydney and Charlotte Cooper in Tokyo; Editing by Joseph Radford)