Forex: Weekly review

On Monday the euro tumbled to a seven-week low against the dollar and slid versus the yen as rising Italian bond yields stoked concern Europe’s sovereign-debt crisis in deepening.

The euro fell to a record low against the Swiss franc as Austria’s Finance Minister Maria Fekter said Italy will be discussed today at the monthly gathering of euro-area finance ministers.

On Tuesday the euro pared losses against its major counterparts after Luxembourg Finance Minister Luc Frieden said selective default on Greek debt isn’t an option “envisaged” by euro-region finance ministers and Italian government bonds reversed losses.

The yen reached its strongest level against the dollar since the Group of Seven nations jointly intervened to weaken the currency.

On Wednesday the dollar weakened against all major currencies after Federal Reserve Chairman Ben Bernanke reiterated that the central bank is ready to provide additional economic stimulus if needed and investor demand for higher-yielding assets increased.

Australian and New Zealand dollars advanced against the greenback after better-than-expected economic data on China. The GDP growth of China, Australia's first largest and New Zealand's second-largest trading partner, rose at an annual pace by 9.5% between April and June, down from 9.7% in the previous quarter. But its data on industrial production (act. 15.1% vs. con.13.2% and prev. 13.3%) and retail sales (act. 17.7% vs. con.17.0% and prev. 16.39) appeared to be well above median forecasts.

On Thursday the U.S. dollar significantly dropped as late Wednesday Moody's and Chinese ratings agency Dagong both put the US AAA credit rating on negative watch.

On Friday the euro fluctuated against the dollar before as eight banks failed the European Union stress tests after regulators said they had a combined capital shortfall of 2.5 billion euros ($3.5 billion).

The European banks were found to have insufficient reserves to maintain a core tier 1 capital ratio of 5 percent in the event of an economic slowdown, the European Banking Authority said.

The assessments are the first by the European Banking Authority since it was set up earlier this year. Last year’s tests by its predecessor were criticized for not being tough enough because banks were shown to need only 3.5 billion euros more capital, a 10th of the lowest analyst estimate. Banks that fail the stress test must present a plan to raise more capital within three months.

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