The euro fell from seven-week highs against the dollar on Wednesday on concerns about the growth outlook for the global economy and plans to test the financial health of European banks.
European regulators on Wednesday haggled over what details to reveal about stress tests of about 100 banks in a dispute that could undermine confidence in the health checks on the region's lenders.
The euro eased after reaching $1.2663 on trading platform EBS on Tuesday, its highest level in about seven weeks. It fell 0.2 percent to $1.2592 EUR= after worse-than-expected data showed factory orders in Germany, the euro zone's largest economy, fell for the first time this year in May.
The euro remains vulnerable to another downturn as investors begin to look to the 16-member bloc's growth prospects amid a back drop of strict budget cuts and the potential for another downturn in the global economy, said Omer Esiner, a chief market analyst at Commonwealth Foreign Exchange in Washington, DC.
Traders said the euro may be hemmed in as options with strike prices at $1.2500 and $1.2600 expire later in the day.
There's still an awful lot of uncertainty in Europe and the stress tests are the next big event... If growth concerns return then Europe will be worse hit than the U.S., said Derek Halpenny, European head of global currency research at BTM-UFJ.
EURO UPSIDE LIMITED
The euro gained support earlier this week after a solid Spanish syndicated debt sale on Tuesday eased euro zone debt fears and weak U.S. data hit the dollar.
Analysts said the single currency could rise further in the short term as a raft of weak U.S. data prompts investors to unwind long dollar positions and short euro positions built up since the start of the year.
Still, most analysts in a Reuters poll believe the euro will stay weak against the dollar over the coming year. The survey of about 60 analysts, taken July 2-7, predicted the euro would fall to $1.24 in one month and $1.20 in three months, then to $1.18 in six months and in mid-2011.
A further deterioration of growth momentum in the U.S. would also directly and exponentially impact growth conditions in the Eurozone, putting the banking sector at additional risk, said Manuel Oliveri, a currency analyst at UBS AG.
Traders said the world's other major central banks may also need to ease policies further in the event of a U.S. double-dip and that the implications for currencies were far from clear.
Flow wise, a trend of structural outflows from the Euro zone remains fully intact, said Oliveri in a note to clients. Without long-term oriented flows returning, any further upside in the single currency will likely remain limited.
The dollar fell 0.3 percent to 87.28 yen JPY=, not far from a seven-month low of 86.96 yen hit on EBS last week.
Against other currencies, the greenback pared losses made on Tuesday after a lackluster report on the U.S. service sector added to data suggesting recovery in the world's largest economy is slowing. U.S. shares built on Tuesday's gains, with energy shares among top advancers.
The dollar index .DXY edged up 0.3 percent to 84.10, rising off a two-month low of 83.825 hit earlier this week.
The Australian dollar AUD=, which has a strong correlation with Asian shares, fell 0.2 percent to $0.8508. And the New Zealand dollar NZD= traded above the 55-day simple moving average for the second straight day after breaking it and closing below it on June 29, according to Reuters data.
The kiwi was last up 0.6 percent at $0.6990.
(Additional reporting by Lin Noueihed in London; Editing by Andrew Hay)