The greenback remained under pressure against the Japanese yen in Asia following previous day's decline and fell to 86.97 due to the weakness in Asian stocks (Nikkei-225 fell by 2.86%). Although the pair briefly recovered to 87.37 in European morning, the greenback later tumbled to a 7-month low of 86.27 after the release of University of Michigan consumer sentiment which dropped to the lowest level since August 2009 at 66.5, this was worse than market forecast of 74.0. The figure suggested the U.S. economic recovery is stalling and the pair closed down on weekly basis at 86.55, suggesting further losses would be seen next week.

Versus other major and commodity currencies, dollar staged a strong rebound in U.S. session as the broad-based selloff in U.S. equities rekindled risk aversion activities, investors dumped risky assets and moved to U.S. dollar as safe-haven currency. Dow Jones Industrial index tumbled by 261 points, or 2.52% to 10,098 while S&P and Nasdaq tanked by 2.88% and 3.11% respectively as earning from U.S. giant corporations GE, Bank of America Corp. and Citigroup disappointed investors. The European stocks also weakened sharply as FTSE-100, CAC-40 and DAX fell by 1.01%, 2.28% and 1.77% respectively.

Although the single currency traded with a soft undertone in Asia on cross selling in euro versus yen after previous session's rally to 1.2955, price briefly hit an intra-day low of 1.2890 in European morning, buying interest there lifted the pair after IMF's chief Strauss-Kahn said that stress test will show all major European banks are sufficiently solid and his comment eased concerns about fiscal problems in the eurozone. The single currency then rose to a fresh 2-month high of 1.3008 at New York opening. However, euro retreated shprply to 1.2915 on profit-taking due to the weakness in U.S. equities and later closed the day at 1.2928.

In other euro-related news, European Union government has agreed details of the planned stress test on banks, with core tier 1 capital a criterion for success or failure and exposure to sovereign risk will be the second indicators in the order of importance. Eurogroup President Jean-Claude Juncker said in the interview that he does not expect any big catastrophes from stress tests and realized euro is not in danger. He added no country wants to leave euro zone. Earlier in Tokyo, French PM Francois Fillon said that Europe's debt crisis is more to do with badly managed public finances than fundamental weakness in the single currency system. He added that Greece has endangered the credibility of its budgets but public finances in the EU are no worse than the situation in the U.S. and Japan.

In addition, Chinese Premier Wen who was speaking at a conference with visiting German Chancellor Angela Merkel in Beijing said 'euro has been n will be in the future an important investment choice for China.'

The British pound traded sideways in Asian session after surging to a high of 1.5473 in the previous session, selling pressure at 1.5448 knocked sterling lower n the pound later tumbled to as low as low as 1.5279 in New York mid-day on active cross selling in sterling, eur/gbp rose from 0.8365 to 0.8462 and gbp/jpy fell from 135.07 to 132.04.

On the economic front, the eurozone turned to a trade deficit in May as EU trade balanced came out at -3.47B euros, worse than the estimate of -0.5B euros. U.S. consumer price index in June dropped for a third straight month as U.S. CPI in June fell by 0.1%, versus the expectations of 0.0% and -0.2% in May. CPI core in June rose by 0.2%, the second monthly gain and better than the forecast of 0.1%. U.S. Net long-term capital inflows fell to $35.4 billion in May, worse than the estimations of $40.0B

Economic data to be released next week include: U.K. Rightmove hse prices , EU Current account, U.S. NAHB housing mrkt index (Japanese market is closed for holiday) on Monday, Germany PPI, Swiss Trade Balance, U.K. PSNCR, PS net borrowing, U.S. building permits. Housing starts, Canada BOC rate decision on Tuesday, Australia Westpac leading economic index, U.K. BOE meeting minutes, Canada Wholesale sales on Wednesday, Japan All industry index, EU PMI, Industrial orders, U.K. Retail sales, Canada Retail sales, U.S. Jobless claims, Leading indicators, Existing home sales, House price index on Thursday, Australia Export prices, Import prices, Germany Ifo index, Canada CPI on Friday.