July 20, 2010 / 8:12 PM / 10 years ago

FOREX-Euro slips from 10-week high vs dollar

* Euro reverses gains after hitting $1.3029

* Bank stress tests, auction jitters weigh on euro

* Yen down on intervention risk (Updates prices)

By Steven C. Johnson

NEW YORK, July 20 (Reuters) - The euro retreated from a 10-week high against the dollar on Tuesday as investors locked in profits on recent euro gains ahead of European bank stress test results.

Traders pushed the euro to $1.3029 EUR=EBS overnight but were reluctant to take it higher for fear that the stress test results due Friday would show some banks need to raise more capital.

The euro traded at $1.2894, down 0.4 percent. Disappointing quarterly results from Goldman Sachs Group Inc (GS.N) and some other companies initially rattled U.S. stock markets and took the euro as low as $1.2840, before it pared losses slightly.

“We’ve had three recent attempts above $1.30, and the euro’s come back each time,” said Camilla Sutton, senior FX strategist at Scotia Capital in Toronto. “Markets are looking for a catalyst to take it back up or push it down, and as long as the stress tests come out as expected with no big surprises, we could make a temporary new high above $1.30.”

Some analysts say the test results could soothe concerns about how European banks would cope with a deterioration in the region’s economy and financial markets. Some in the market say banks may not pass the test.

Though nationalized German lender Hypo Real Estate is expected to fail, a source said on Monday, analysts said results may still be positive for the euro because signs of weakness would demonstrate the test’s validity.

“If all of the banks passed, the market would say the tests were unrealistic,” said Lutz Karpowitz, currency strategist at Commerzbank in Frankfurt. [ID:nLDE66I20V]

DOLLAR’S DWINDLING YIELD ADVANTAGE

Against the yen, the dollar rose 0.7 percent to 87.36 yen JPY=EBS after hitting a seven-month low of 86.27 on EBS on Friday.

Recent yen strength has prompted market investors to consider how Japanese authorities may deal with a firmer currency. Traders suspect they may not want to see the 85-yen level breached, though many doubt Tokyo is ready to intervene.

Traders said dollar weakness is partly a function of fading expectations for a U.S. interest rate hike in 2010.

The euro has rallied more than 5 percent so far this month on easing concern about the euro zone debt crisis and after weak U.S. economic news eroded the dollar’s yield appeal.

The yield on the two-year Treasury note touched a record low on Tuesday after the government reported U.S. housing starts hit their lowest level in eight months in June. The data was further evidence the economy has lost steam.[ID:nN20249501]

The Canadian dollar rose about 0.7 percent to C$1.0472 CAD= per U.S. dollar on Tuesday after the Bank of Canada raised interest rates for the second time in two months.

However, the bank cautioned that the domestic and global recoveries will be slower than previously expected, which traders said makes future hikes less certain and could take some shine off the Canadian dollar. [ID:nBCLKIE60X]

Euro declines picked up speed after Hungary sold a smaller amount of three-month Treasury bills than originally planned. [ID:nBUD005418]

This contrasted with smoother debt auctions elsewhere. Ireland sold 1.5 billion euros in bonds on Tuesday, weathering a ratings cut by Moody’s, while Spain and Greece found buyers for shorter-term paper in further signs of recovering demand for peripheral euro zone debt. See [ID:nLDE66J10W] (Additional reporting by Wanfeng Zhou in New York and Naomi Tajitsu in London; Editing by Leslie Adler)

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