By Frances McInnis
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)-- The euro rose modestly against the dollar Monday as investors anticipated that stress tests of European banks will show the region's financial system is sound.
Steadily rising investor confidence over Europe's ability to right its troubled banking sector propelled the common currency above the $1.30 level for the first time in two months late last week. There is room for the euro to rise even higher, analysts said, if the stress tests go well. Nerves ahead of Federal Reserve Chairman Ben Bernanke's testimony to Congress on Wednesday also weighed on the dollar against the euro. Investors will be listening closely to Bernanke's remarks for further clues as to the pace of the U.S. economic recovery.
After several weeks in which concerns about the U.S. recovery took center stage in currency markets, the initial results from stress tests, due Friday, are now dominating trading, said Julia Coronado, economist at BNP Paribas in New York.
The euro rose, showing that "on balance, people have become a bit optimistic," about the results of the stress tests," said Coronado.
With the Japanese markets closed for a national holiday, and trading flows already light due to the summer season, movements in currency markets were tentative.
Late Monday, the euro was at $1.2945 from $1.2927 late Friday, according to EBS via CQG. The dollar was at Y86.86 from Y86.61, while the euro was at Y112.45 from Y111.95. The U.K. pound was at $1.5231 from $1.5298. The dollar was at CHF1.0549 from CHF1.0519.
The ICE Dollar index, which tracks the dollar against a trade-weighted basket of currencies, was at 82.591 from 82.535.
To see the euro's performance against the dollar, please see:
http://dowjoneswebservices.com/chart/view/4285
The Committee of European Banking Supervisors is testing 91 banks to see whether they can withstand a three-percentage-point decline in gross domestic production from European Commission forecasts for 2010 and 2011. The committee will also test the banks for resilience to sovereign risk at a level beyond the market conditions experienced in early May.
The ability of the stress tests to soothe investor concerns will rely on the robustness of the tests, as well as the results, said Jessica Hoversen, fixed income and foreign exchange analyst at MF Global in Chicago.
Despite some uncertainty over how the tests were administered, investors remain positive about the tests, said Simon Smollet, senior foreign-exchange options strategist at Credit Agricole CIB in London.
"Banks will need extra capital, but hopefully the capital will be a reasonable amount that the market can provide," he said.
The common currency's gains on Monday came despite some negative headlines out of Europe.
Moody's Investors Service cut Ireland's rating Monday, to Aa2 from Aa1, with a stable outlook. The agency cited a rising debt burden, the high cost of rebuilding the country's banking system and sluggish growth as factors in the decision.
In Hungary, the forint fell to its lowest levels in more than a year after negotiators for the International Monetary Fund and European Union walked away from funding talks because Hungary hadn't delivered on required austerity measures.
The breakdown in talks between Hungary and the multilateral bodies has implications beyond Eastern Europe, as it offers a clear sign that international aid is tied to strict conditions.
The U.K. pound gave back some recent gains on the greenback, slipping modestly on the day. But attention remained on the pound as an alternative to the dollar, euro and yen as Singapore's state investment company Temasek Financial Ltd priced its first sterling-denominated bond issue Monday, raising a total of GBP700 million.
With the ICE Dollar Index strengthening slightly, Deutsche Bank's PowerShares U.S. Dollar Index Bearish exchange-traded fund was down 0.12% from late Friday, while its PowerShares U.S. Dollar Index Bullish was up 0.08%. The two exchange-traded funds are based on Deutsche Bank currency futures indexes, whose composition mirrors that of the ICE's Dollar Index.
-By Frances McInnis, Dow Jones Newswires
source: The Wall Street Journal
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