Daily Forex Overview

Previous session overview

The euro lost ground against both the dollar and the yen Tuesday as market concerns about the financial health of European banks came back to the fore.

The euro was at USD1.2807 and JPY107.67 as of 0450 GMT, from USD1.2879 and JPY108.51 in late London trading on Monday (New York was closed for a holiday).

Elsewhere, the Australian dollar fell against the yen and U.S. dollar on a dovish statement from the Reserve Bank of Australia, and confirmation that Julia Gillard's Labor government will remain in power.

The country's central bank left interest rates unchanged at 4.50% for a fourth month in a row, and noted caution about the global economic outlook. Meanwhile, given Gillard's support for a resources rent tax on the mining sector, currency traders had viewed support of her government as a negative for the local currency.

At 0450 GMT, the Australian dollar was at JPY76.93 from an earlier high of JPY77.31, and down at USD0.9148 from an earlier high of USD0.9180.

The yen, meanwhile, traded in a narrow range against the dollar. In late afternoon trading the greenback was at JPY84.06 from JPY84.22 in late London trading on Monday.

The yen showed little reaction to an announcement from the Bank of Japan after its regular policy board meeting. The central bank said it was maintaining its super-easy monetary policy, but reaffirmed BOJ Gov. Masaaki Shirakawa's pledge to take policy action if necessary. BOJ watchers took the statements as a sign the central bank is ready to loosen policy further should a surge in the yen imperil Japan's fragile economy.

Market expectation

Analysis revealed that Europe's recent stress tests of the strength of major banks understated some lenders' holdings of potentially risky government debt.

The analysis found that an examination of the banks' disclosures indicated that some banks did not provide as comprehensive a picture of their government-debt holdings as regulators claimed. In addition, it said, some banks excluded certain bonds, and many reduced the sums to account for "short" positions they held. It said that neither regulators nor most banks disclosed these facts when the test results were published in late July.

Traders said there had been talk since the stress test results were released that the measure might not be rigorous enough to ensure that banks were in sufficient financial condition.

European stocks were lower Tuesday, with the banks in focus as a Wall Street Journal article on the European stress tests raised fears about the banks' exposure to sovereign debt.

EURCHF is on the slide again as safe-haven flows push the cross to the day's low of 1.2904. That's a one-cent loss on the day and well off Friday's post payrolls highs of 1.3164. Next support for the cross is the August 31 all-time low of 1.2850.

EURUSD has fallen to its 20DMA and 55DMAs at USD1.2788 and USD1.2776 respectively and any break here will need to hold above support at USD1.2730 for an upside bias to be maintained say analysts. While the latter holds she looks for a recovery toward USD1.2925-65 ahead of USD1.3030-50. Failure at USD1.2730 opens the downside toward the recent USD1.2588 lows say analysts.

Most important events of the day