The euro fell from seven-week highs against the dollar on Wednesday on concerns about the growth outlook for the global economy and as investors scrutinized details of plans to test the financial health of European banks.
A European committee of bank supervisors will outline on Wednesday the methodology for stress tests of about 100 banks but German banking sources said the test would exclude a haircut on German sovereign bonds.
The euro eased 0.3 percent to $1.2581 EUR= in morning trading in New York, after reaching $1.2663 on trading platform EBS on Tuesday, its highest level in about seven weeks.
It was little changed 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.
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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.
The euro had 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, but market players were still refraining from taking long positions in the euro.
Yesterday was a short-term correction to a long-term downtrend. Euro/dollar could still go up but I would be surprised if it went much higher, said Michael Hewson, currency strategist at CMC Markets.
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 other recent data suggesting recovery in the world's largest economy was slowing and shares gave up Tuesday's gains as demand for riskier assets faded.
The dollar index .DXY edged up 0.13 percent to 84.195, staying near a two-month low of 83.825 hit earlier this week.
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.
The Australian dollar < AUD=>, which has a strong correlation with Asian shares, fell 0.2 percent to $0.8508.
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.
(Additional reporting by Lin Noueihed in London) (Editing by Theodore d'Afflisio)