European Banks Stress Tests Reveal No Shocks

By: Hillel Fuld
The EUR hovered close to a two-month record vs the USD on Tuesday, retaining support after last week's European bank stress tests revealed no issues while demand for riskier assets weighed on the dollar increased significantly.

Although concerns were voiced that the tests were not aggressive enough, experts claimed these could be calmed when Deutsche Bank announced its exposure to euro zone sovereign debt.

The USD fell to a 12-week low against a variety of currencies as recent weak U.S. data accompanied an otherwise more optimistic outlook for the broader global economy, encouraging investments in higher-yielding and riskier assets.

Underscoring this, India hiked interest rates on Tuesday citing inflationary pressures and a firm economic comeback, while the Reserve Bank of New Zealand is expected to raise rates in the coming days.

"We are seeing a more risk friendly environment," said Peter Frank, currency strategist at Societe Generale.

"The market has drifted away from fears of a double dip, and the rate tightening environment -- with a rate hike in India and one expected in New Zealand -- is attracting flows into higher yielding and emerging market assets and out of the dollar".

The EUR was steady at $1.2992, having previously risen as high as $1.3023. Traders cited Asian central bank bids around $1.2970-80, but said reported offers above $1.3020 on behalf of a European sovereign were bringing gains.

The euro headed towards last week's more than two-month record of $1.3029. If it exceeds this, its next target will be $1.3125, the 38.2 percent retracement of its December-June fall, technical analysts said.

Falls were also seen limited while it remained above support at $1.2870 -- close to its 100-day moving average -- and last week's low around $1.2730.

Traders were cautious as they awaited clarifications on Deutsche Bank's debt exposure after the German bank posted second-quarter earnings.

However, they said if the bank discloses no surprises, this could help build confidence in euro zone banks and cancel out concerns about a lack of transparency in the stress tests, triggering buying in the European currency.


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