NEW YORK (Dow Jones)--The euro posted modest gains Friday as most European banks passed regulatory stress tests and initial doubts over the tests' stringency were allayed as investors dug into the details. The common currency was also buoyed by another set of better-than-expected data--German business sentiment rose more than expected last month--and an afternoon rally in U.S. stocks. The advance for U.S. equities, with the Dow Jones Industrial Average rising about 100 points, touched off the euro's recovery, said Sebastien Galy, currency strategist at BNP Paribas in New York. The common currency also gained as investors began sifting through the stress-test results, with the richness of detail allaying some lingering concerns over the tests' toughness, said Galy. Late Friday, the euro was trading at $1.2918 from $1.2892 late Thursday. The dollar was at Y87.45 from Y86.93, while the euro was at Y112.98 from Y112.05. The U.K. pound was at $1.5432 from $1.5265. The dollar was at CHF1.0527 from CHF1.0428. The ICE Dollar Index, which tracks the dollar against a trade-weighted basket of currencies, was at 82.475 from 82.611. To see the euro's performance against the dollar, please visit: http://dowjoneswebservices.com/chart/view/4301 The European Union had hoped that the tests, administered by the Committee of European Banking Supervisors, would restore trust in the European banking system, which has been shaken by severe concerns about sovereign debt. The tests found that seven banks would need to raise new capital to fortify their finances and weather a potential economic downturn or another debt crisis in Europe. The handful of banks that failed were smaller banks of low consequence, said Ron Leven, currency strategist at Morgan Stanley in New York. Still, it was "enough to show this was a serious exercise." Five Spanish banks, one German bank and one Greek bank were the only institutions to fail the tests. Their combined shortfall would be about EUR3.5 billion, a number that struck many analysts as too low. Trading was volatile ahead of the release of the tests, with the euro touching an intraday low of 1.2794 as it became clear that the tests wouldn't include a sovereign default scenario. "As we've started getting the individual bank reports, some of them have been extremely detailed, and that has bolstered the credibility," said Morgan Stanley's Leven. Data from the Commodity Futures Trading Commission Friday "reflect a lot of hesitation to increase bets ahead of the stress test releases," said Sacha Tihanyi, currency strategist at Scotia Capital in Toronto. The data covered the week ended Tuesday. Investors cut their bets against the euro for the third week in a row, but the change was modest, said Tihanyi. Net speculative bets, called shorts, against the euro were at 24,250 with a value of $3.9 billion, down slightly from last week's 27,000 contracts with a value of $4.3 billion, according to analysis by Scotia Capital. Separately, sterling was up sharply--more than 1%--against the dollar after second-quarter gross domestic product in the U.K. beat forecasts. The U.K. economy expanded 1.1% for the quarter, the fastest pace in more than four years, and well above the 0.6% growth economists had expected. With the ICE Dollar Index weakening, Deutsche Bank's PowerShares U.S. Dollar Index Bearish exchange-traded fund was up 0.23% from late Thursday, while its PowerShares U.S. Dollar Index Bullish was down 0.17%. The two exchange-traded funds are based on Deutsche Bank's currency futures indexes, whose composition mirrors that of the ICE's Dollar Index. -By Frances McInnis Dow Jones Newswires; 212-416-3417; frances.mcinnis@dowjones.com

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