Another strong data release boosted the euro on Friday when the German Ifo index came in above forecasts, but analysts said there were downside risks for the currency, even if bank stress test results were benign. Ifo said the German Business Climate Index for July was 106.2, beating a consensus for 101.6 and pushing the euro to a session high versus the dollar of $1.2967.
The data followed strong euro zone purchasing manager surveys which helped push the euro up more than 1 percent on Thursday. "We've seen a big jump in the euro as the Ifo data bodes positive for Germany's growth outlook ... but the move may be undone if we get a negative surprise from the stress test," said Sverre Holbek, currency strategist at Danske in Copenhagen.
Official results of the test are due around 1600 GMT. At 1114 GMT, the euro was up around 0.4 percent at $1.2930, recovering from the day's low of $1.2861 after Spanish newspaper El Pais reported that several of the country's 18 savings banks had failed the stress tests.
"The market's assumption is that several of the Spanish cajas will fail, along with some peripheral European banks. But if it goes beyond that the euro reaction will be negative," said Adam Cole, head of global FX strategy at RBC Capital Markets. Orders seen around $1.2820 had limited the euro's fall in early trade, but Citigroup analysts said they saw a downside risk for EUR/USD after the results are published. Euro/dollar 1-month risk reversals, a measure of currency sentiment, showed a bias for euro downside. Traders said that partly reflected speculation the euro may start falling some time after the test results.
The euro was up 0.6 percent versus the yen at 112.75 yen, having risen about 0.9 percent on Thursday. It fell to the day's low of 111.73 yen after the newspaper report. The dollar was up 0.3 percent versus the yen at 87.19 yen, staying above 86.27 yen struck on trading platform EBS late last week, its weakest since December 2009. The greenback was down 0.3 percent versus a currency basket at 82.389. Sterling rose over 1 percent on the day to $1.5450, boosted by data showing Britain's economy grew almost twice as fast as expected in the second quarter of this year.