MW: Dollar turns up as investors await stress tests
British pound rises on stronger-than-expected second-quarter growth
By Deborah Levine and William L. Watts, MarketWatch
NEW YORK (MarketWatch) -- The U.S. dollar recovered on Friday from a brief loss, with trading muted amid nervousness about the soon-to-be-published European bank stress tests.
The euro gained earlier after an unexpected jump in a German business-climate gauge.
The euro (CUR_EURUSD 1.2823, -0.0060, -0.4657%) declined to $1.2799 from $1.2901 in late North American trading Thursday. It touched $1.2966 in earlier action.
The dollar index (DXY 82.88, +0.29, +0.35%) , which tracks the greenback against a basket of major currencies, edged up to 83.028 from 82.581 late Thursday.
Near-term direction for the dollar will likely remain dictated by risk-appetite levels, which will revolve around the outcome of the stress tests.
The dollar was slightly higher against the Japanese yen (CUR_USDYEN 87.2600, +0.2400, +0.2758%) , buying ¥87.25, compared with ¥87.04 Thursday.
The euro turned down against the yen (CUR_EURYEN 111.8900, -0.2500, -0.2229%) to ¥111.79 from ¥112.45.
Since the depths of the financial crisis, the dollar and yen have tended to lose ground when risk appetite is rising, while gaining ground on safe-haven flows when investors are seen moving away from risk.
In evaluating the reliability of the European Union's tests, analysts are watching for how many banks are deemed to need to raise capital, and where those banks are.
"Whether the E.U. stress tests are a buzz kill for the financial markets and the euro will largely depend on the number of banks failing as well as their concentration," said Kathy Lien, director of currency research at Global Forex Trading.
"If, for example, more than 50% of the failing banks are in Spain, the impact on the euro could be more significant than if it was more diversified, especially among countries that are smaller GDP contributors for the euro zone," she wrote in emailed comments.
Reports in the past week have leaked the results for many banks, including one German bank. If more than one bank there -- in the region's largest economy -- fails, "it could also have a strong repercussions for the euro," Lien said.
Authorities are set to release the results of the stress tests at 5 p.m. London time, or noon Eastern. Read about the stakes for European financial markets.
Markets would be comfortable if the banks need to raise as much as $100 billion, according to Brown Brothers Harriman.
"Anything too low and markets will question the stress assumptions, while anything too high and concerns about the banking sector will pick up again" said Marc Chandler, global head of currency strategy at Brown Brothers. "It's a delicate balancing act."
German, U.K. data
Earlier in the session, the euro jumped after the Munich-based Ifo Institute said its July business-climate index jumped to 106.2 from 101.8, defying expectations for a slide to 101.5. Read about the Ifo data.
Also, an unexpectedly strong surge in second-quarter British gross domestic product helped the British pound (CUR_GBPUSD 1.5370, +0.0117, +0.7671%) surge above $1.54 before giving up some ground. It recently bought $1.5374, up from $1.5278. The euro fell 1.2% to trade at 83.41 pence.
While the Ifo data may have got more attention than it deserved, the 1.1% rise in second-quarter British GDP may prove to be a "game changer" for the pound, said Peter Rosenstreich, currency strategist at ACM in Geneva.
The boost took economists and traders by surprise, outstripping the consensus forecast for a 0.6% quarterly increase. Read about the British GDP surge.
The Bank of England's Monetary Policy Committee in July debated the need for additional monetary-policy easing, including adding to quantitative easing, before voting 7-1 to hold rates steady. MPC member Andrew Sentance was the lone dissenter, calling for a quarter-point rate hike.
The stronger-than-expected second-quarter growth figures coupled with an annual inflation pace that remains well above the Bank of England's 2% annual target will likely lead to talk of further quantitative easing being scaled back or even pulled off the table completely, which is bullish for the pound, Rosenstreich said.
