By: Hillel Fuld
The EURO nosedived on Tuesday from a three-week record versus the USD hit yesterday as rekindled worries about the European banking sector prompted investors to reduce risks.

The euro declined 0.6 percent on the day to $1.2797 following triggering stop-loss orders in the $1.2850-60 area, as a Wall Street Journal report stoked fears about the probability of European banks by highlighting the weakness of euro zone stress tests earlier in the year.

The single currency was under further pressure as Germany’s banking association said on Monday the country's 10 biggest banks may need 105 billion euros of additional investment under a revamp of banking rules designed to prevent future financial crises.

The euro on Monday rose as high as $1.2920, its highest in almost a month.

It is now testing support at $1.2795-80, with the 21-day moving average at $1.2795 on Tuesday and the 55-day moving average at $1.2788.

"Concerns about euro zone banks have been growing again, hitting investor sentiment that had improved a little after better-than-expected U.S. jobs data last week," said Tsutomu Soma, senior manager of the foreign securities department at Okasan Securities.

"The trend in the euro might have changed as the market's mood is shifting back toward risk reduction."

The dollar index, a gauge of the U.S. currency's performance against a basket of six major currencies, increased 0.4 percent to 82.403 .DXY, rebounding from a four-week trough of 81.876 marked on Monday.

U.S. financial markets were closed on Monday for the Labor Day holiday and will resume trading later in the day.

The USD was steady against the yen at 84.23 yen, remaining within reach of a 15-year low of 83.58 JPY hit last month, as investors are expressing interest in buying safe-haven currencies, such as the Japanese currency and the Swiss franc.

Versus the Japanese currency, the euro slid 0.6 percent to 107.76, although it was still well above a nine-year low of 105.44 yen reached in late August.

The EUR was down 0.7 percent against the Swiss franc at 1.2945 francs, inching towards an all-time low of 1.2850 francs struck on Aug. 31.

The Bank of Japan completes its two-day policy meeting later in the day and is expected to put easing monetary policy on hold this time.

The BOJ boosted its cheap loan scheme at an emergency meeting last week, buckling to government pressure for steps to protect a fragile recovery after the yen exploded to a 15-year high vs the dollar.

The greenback could slip further, given expectations that the central bank will take no additional easing steps in the near future, while worries over possible market intervention by Japanese authorities to rein in the yen's gains is keeping speculators careful about aggressively taking long yen positions, traders said.

The AUD dipped 0.2 percent on the day to $0.9151, having slipped from a four-week high of $0.9181 hit on Monday.

The Reserve Bank of Australia is widely expected to keep rates at 4.5 percent at its board meeting on Tuesday. Investors will be looking for the central bank's view on the economy after recent strong domestic data. A policy decision is expected at 0430 GMT. [AU/INT]

"The Australian dollar is likely to extend its recent gains if the RBA's statement suggests it could further boost interest rates," said Hideki Hayashi, global economist at Mizuho Securities.