Euro steadies in London

The euro steadied against the dollar on Friday, as fears the results of European bank stress tests due later in the day could further sour sentiment towards the currency were tempered by concerns about US debt after a rating agency warning. With worries about the eurozone and the United States roughly offsetting each other, the euro was left stuck in a range above a four-month low of $1.3838 hit earlier this week and below Thursday's high of around $1.4282.
The euro was last up 0.1 percent at $1.4156. Traders said demand from sovereign names had supported the single currency, though they expected gains to be limited due to offers reported at between $1.4190 to $1.4225. "Range-trading (in euro/dollar) is likely because fundamentals everywhere are so bad," said Jane Foley, currency strategist at Rabobank.
Many investors, while cautious, did not expect the stress test results at 1600 GMT to have a significant market impact. They are expected to show around 10 lenders have insufficient capital to withstand a prolonged recession. While there have been question marks over the tests' credibility, no large bank is expected to fail and the total capital needed could be under 10 billion euros.
"It could be that the stress tests are a bit of a non-event ... The market is bracing itself for something which may not be brilliant but will show that banks are holding their heads above water," Rabobank's Foley said. With the outlook for euro/dollar muddied by major concerns about debt in both the eurozone and the US, some analysts advocated buying the safe-haven Swiss franc as a hedge against downside risks to both the euro and the dollar.
"Given the sovereign debt problems in the Eurozone, we would expect the Swiss franc to act as the major outlet to USD downside should a ratings adjustment occur. USD/CHF and to a lesser extent, EUR/CHF should decline," Commonwealth Bank of Australia analyst Richard Grace said in a note.
The euro rose 0.15 percent to 1.1557 francs while the dollar was steady at 0.8160 francs. However, both the euro and the dollar hovered not far from recent record lows of 1.1494 francs and 0.8080 francs respectively. Elsewhere, the Australian dollar fell sharply, trading down 0.6 percent at $1.0650, after a Westpac note said the next rate move by the Reserve Bank of Australia would be a cut and forecast 100 basis points of easing through 2012.
Implied volatility in euro/Swiss one-month implied vols rose higher than Aussie/dollar one-month implied vols for the first time ever, which analysts said reflected a continued search for safer alternatives as the eurozone debt crisis rages. The dollar traded at 79.06 yen above a session low of 78.89 hit shortly after S&P's warning.