The euro slipped from a more than two-month high against the dollar on Tuesday as falling equities hit risk appetite, prompting investors to book profits ahead of the results from stress tests on European banks.
Investors questioned whether the currency would sustain gains above $1.30 given that the stress test results due on Friday may show weakness in some euro zone banks. The euro retreated after hitting $1.3029 on electronic trading platform EBS.
Losses in the euro were limited as U.S. stocks came off session lows after coming under pressure on disappointing quarterly results from Goldman Sachs Group Inc (GS.N) and some other big companies.
We've just seen a decent round of profit-taking. There is concern about the stress tests results, said John McCarthy, director of foreign exchange trading at ING Capital Markets in New York. We've touched a high of almost $1.3030. People said that's enough for the euro for the time being.
In midday New York trading, the euro EUR= traded 0.3 percent lower at $1.2903. Against the yen, the euro rose 0.3 percent to 112.57 EURJPY=.
Win Thin, senior currency strategist at Brown Brothers Harriman, said a report by Spanish media quoting Spain's economy minister, Elena Salgado, that all Spanish banks had passed the stress tests helped the euro pare losses.
For now, the market is unwilling to push the euro aggressively either way ahead of Friday, and seems to have carved out a near-term trading range around $1.27 and $1.30 that's held since July 14, he said.
The dollar rose 0.6 percent to 87.23 yen JPY=, though it remained near a seven-month low of 86.27 hit on EBS on Friday.
Recent yen strength has prompted market investors to consider how Japanese authorities may deal with a firmer currency. Traders suspect they may not want to see the 85-yen level breached in a hurry, though many doubt Tokyo is ready to intervene.
The U.S. dollar dropped 0.3 percent against the Canadian currency at C$1.0519 CAD=. The Bank of Canada raised interest rates for the second time in two months, but cautioned that the domestic and global recoveries will be slower than previously expected.
DEBT AUCTIONS, HOUSING DATA
Declines in the euro accelerated after Hungary sold a smaller amount of three-month Treasury bills than originally planned.
This contrasted with smoother debt auctions elsewhere. Ireland sold 1.5 billion euros in bonds on Tuesday, weathering a ratings cut by Moody's, while Spain and Greece found buyers for shorter-term paper in further signs of recovering demand for peripheral euro zone debt.
The euro had rallied more than 5 percent so far this month on easing concern about the euro zone debt crisis and after weak U.S. economic news eroded the dollar's yield appeal.
U.S. yields continue to sink and that's undermined the dollar's support a bit, said ING's McCarthy.
The yield on the two-year Treasury note touched a record low on Tuesday after the government reported U.S. housing starts hit their lowest level in eight months in June. The data was further evidence that the economy lost momentum, but a rise in permits offered hope that homebuilding was poised to pick up.
Some in the market say results of the European Union bank stress tests could soothe market concerns about the region's banking system, though some banks may not pass the test.
Nationalized German lender Hypo Real Estate is expected to fail the test, a source said on Monday.
Analysts said that even if some banks failed the test, the results would be overall positive for the euro because signs of weakness would demonstrate the test's validity.
If all of the banks passed, the market would say the tests were unrealistic, said Lutz Karpowitz, currency strategist at Commerzbank in Frankfurt. (Additional reporting by Naomi Tajitsu; Editing by Leslie Adler)