Another strong data release boosted the euro on Friday when the German Ifo index came in above forecasts, but analysts said there were downside risks for the currency, even if bank stress test results were benign.
Ifo said the German Business Climate Index for July was 106.2, beating a consensus for 101.6 and pushing the euro to a session high versus the dollar of $1.2967 EUR=.
Strong euro zone purchasing manager surveys helped push the euro up more than 1 percent on Thursday.
The euro had hit the day's low of $1.2861 EUR= on Friday after Spanish newspaper El Pais reported that several of the country's 18 savings banks had failed the stress tests.
But losses on the report were contained as many investors awaited the official results at about 1600 GMT.
The market's assumption is that several of the Spanish cajas will fail, along with some peripheral European banks. But if it goes beyond that the euro reaction will be negative, said Adam Cole, head of global FX strategy at RBC Capital Markets.
Traders said movements ahead of the test results were likely to be well contained, with orderboards showing good interest to buy any dip towards $1.2820. Asian sovereign sales were said to be slowing the euro's gains.
At 0943 GMT, the euro was up around 0.4 percent at $1.2939. Market players said there were downside risks for the single currency, even if the test results were perceived to be benign.
We see an asymmetric downside risk for EUR/USD as the results are published, analysts at Citigroup said in a note to clients.
This reflects an almost no-win situation: either the test results condemn a sufficiently large number of banks or they will be deemed inadequate by the market.
Euro/dollar 1-month risk reversals EUR1MRR=ICAP, a measure of currency sentiment, showed a bias for euro downside. Traders said that partly reflected speculation the euro may start falling some time after the test results.
The euro was up 0.6 percent versus the yen EURJPY=R at 112.70 yen, having risen about 0.9 percent on Thursday. It fell to the day's low of 111.73 after the Spanish newspaper report.
The dollar was up slightly versus the yen JPY= at 87.09 yen, staying above a seven-month trough of 86.27 yen struck on trading platform EBS late last week.
The greenback was down 0.3 percent versus a currency basket .DXY at 82.344.
Sterling rose over 1 percent on the day to trade above $1.5400, boosted by data showing Britain's economy grew almost twice as fast as expected in the second quarter of this year. [ID:nAHLMIE64J]
(Graphic by Scott Barber; Editing by Ruth Pitchford)