Euro rallies in aftermath of bank stress tests

NEW YORK - The euro rallied to $1.30 on Monday as relief over European bank stress tests and stronger economic data on both sides of the Atlantic gave investors less reason to be risk averse.

By (Reuters)

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Published: Tue 27 Jul 2010, 6:57 PM

Last updated: Thu 2 Apr 2015, 9:44 AM

Worries the tests were not strict enough had some investors hesitant to make big bets on the single currency. But as the trading day progressed, those investors were fewer in number as most were more concerned about missing an uptrend of several days.

Positive economic data in Europe has also helped lift the single currency recently.

The dollar was lower against the yen, though it pared some of those losses after a government report showed better-than-expected new home sales in June. For details, see ¨ûID:nN23137243¨ü

“Despite the market’s single-minded focus on the stress tests, the more important story was the surprisingly strong economic data from the region (last week),” said Boris Schlossberg, a director for currency research at GFT in New York.

In late-afternoon New York trade, the euro rose as high as $1.3006 on electronic trading platform EBS and $1.3005 on Reuters data . The currency last traded up 0.7 percent at $1.2992.

Price action looked as if an options barrier was being defended at $1.3000, though analysts said they doubted a barrier existed, given trades had breached that level on both July 16th and July 20th. The level may be a psychological barrier, however, as the euro has not closed above $1.3000 since early May.

Fear of a euro-zone debt crisis and its impact on European banks drove the euro below $1.19 last month, its lowest level since 2006, but it began a swift recovery in July.

That was partly driven by data showing the euro zone economy has been holding up better than anticipated, even as governments tighten their belts to rein in large deficits.

The stress tests results, which showed only seven of 91 banks failed, helped drive the euro further.

Push toward $1.31

Technical analysts said the euro may still push toward $1.3125, the 38.2 percent retracement of the December-to-June move. It reached $1.3028 last week, according to Reuters data.

Any fall in the euro was also seen limited while it remained above support at $1.2870 — its 100-day moving average — and last week’s low around $1.2730, leaving it hemmed in within a range.

Some said the euro’s gains could also be constrained by this week’s redemption of maturing euro zone bonds and coupon payments worth some 45 billion euros, according to Citi estimates.

“The stress tests failed to inspire much of a euro/dollar rally, but at the same time there is no reason for bears to start selling the euro aggressively either,” said Roberto Mialich, currency strategist at Unicredit in Milan.

The euro rose to its highest since early June against the yen on electronic trading platform EBS as dealers unwound long yen positions. But then ran into offers from Japanese exporters around 113.30/50 yen. It was last down 0.1 percent at 112.80 yen.

The dollar was 0.7 percent lower at 86.83 yen , the session low.

Analysts said Monday’s U.S. new home sales report was a “good surprise” after a string of lackluster data, but more evidence was needed to reassure investors the economic recovery in the United States was still on track.

“The data was pretty surprising, especially considering how poor the numbers were last month. But the jury really is still out,” said John Doyle, senior currency strategist at Tempus Consulting in Washington.

“Unless you see a continued pattern of positive numbers, I think traders are going to be skeptical,” he added. “That’s why the dollar reaction has been pretty muted.”

The Australian dollar rose to its highest since May 11 against the U.S. dollar , as the spread between two-year Australian and U.S. yields rose to around a two-year high. The gains on Monday pushed the Aussie above the 200-day simple moving average for a second straight day.

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