The U.S. dollar continued to capitalize on yesterday's gains against the majors as concerns over European bank stress tests and weak demand at an auction of Portuguese debt highlighted the fragility of the euro zone banking sector. 

Investors are sidelined as they await testimony from Federal Reserve Chairman Ben Bernanke later this morning. The hope is that he comments on whether the central bank has the tools to reinvigorate an increasingly sluggish U.S. economy. If Bernanke acknowledges recent signs of weakness in the U.S. economy and downgrade its growth outlook, the dollar would likely show additional losses, especially against the euro.

As expectations for a Fed rate hike in 2011 diminish, the dollar is struggling. Today's dollar reprieve may be short lived.  

The euro was subjected to profit taking as investors consolidate positions ahead of Friday's stress tests. Though the tests are largely expected to show that all the major European banks have sufficient capital, investors are still in a wait and see position. There is some additional concern that investors may not be convinced by the results if the test criteria are considered to be too lax.    

 

Sterling slipped after Bank of England minutes showed a 7-1 vote in favor of keeping interest rates stable. This news largely diminished speculation that the BoE may begin raising rates before year end.

With investor appetite for risk returning, the Canadian dollar is showing its second consecutive day of gains against the USD.  Supported by rallying global stocks and oil prices nearing $80 a barrel, Canada's commodity-linked currency is on the rise.

The Japanese yen remained firm and near recent seven-month highs against the USD. Bank of Japan Deputy Governor Hirohide Yamaguchi said the central bank is watching currency moves carefully but shrugged off any suggestion that rises in the yen to a specific level would trigger more monetary easing. Yamaguchi stuck to the bank's upbeat view of Japan's economy, saying it was on track for a moderate recovery, but warned that Europe's debt problems and ensuing market instability continued to cloud the outlook.

The Australian and New Zealand dollars held recent gains as investors were reluctant to make any big moves before Federal Reserve Chairman Ben Bernanke gives a testimony before the U.S. Senate. The yield advantages of both currencies have limited selling pressures in the pair. Kiwi investors await a 25 basis-point hike on July 29 when the Bank of New Zealand meets.

Indicative rates:

EUR/USD

1.2913

USD/JPY

86.88

GBP/USD

1.5334

USD/CAD

1.0352

USD/MXN

12.7235

USD/CHF

1.0486

AUD/USD

0.8859

NZD/USD

0.7195

10-Year Treasury Note Yield:  2.932%

Dow Jones Industrial Average:  10,210.82 -19.14

This market summary is prepared by Union Bank's Global FX Department for the general information of its customers. It is based on the most accurate information currently available, but should not be considered investment advice or a guarantee of future exchange rates or trends.