Euro Up After Bank Tests

Posted July 24, 2010

The euro improves Friday as investors take in bank stress test data. The details push investors to riskier investments.


Bank Stress Tests

The currency trading session on Friday was heavily influenced by the bank stress test data that was due to be released during the day. The euro was able to post some gains for the day after the results of the tests showed that most of the European banks tested passed the regulatory stress tests. Investors initially were concerned with the results, but as the details emerged, it looked more confident for investors.

The tests, which were administered by the European Banking Supervisors were supposed to help restore trust in the European financial system, something investors have been concerned with over the last few months as euro zone sovereign debt continued to increase. The data released showed that seven banks need to raise new forms of capital in order to improve their finances in order to make it through a larger economic downturn. Those seven banks were smaller banks and therefore, of less consequence to the larger picture. The banks included five Spanish, one Greek and one German bank. The shortfall equated to about EURO 3.5 billion.


Prior to the release of information about the stress tests, the trading session was highly volatile. The euro fell to as low as US $1.2794 during the day.  The euro zone bank test was thought to have been too weak initially, however investors were able to gain more confidence as the details came out about each bank. Investors helped to increase the euro’s value as they gained insight into just how difficult these tests were, which helped to give them more confidence in the banking sector as a whole.

Also helping the euro was data released regarding the German business sentiment numbers. These numbers rose during the last month to better than expected levels. 

US Stocks

Also helping to encourage investors to move towards the riskier investment of the euro was the US stock market, which rallied during the afternoon session. US equities advanced. The Down Jones Industrial Average rose by as much as 100 points during the day, which was due in part to the euro’s ability to improve after the bank stress test data was announced. 

By the Numbers

By the end of the trading session on Friday, the euro moved from US $1.2892 as of late Thursday to US $1.2918. The euro moved from Y 112.05 to Y 112.98. The US dollar moved from Y 86.93 to Y 87.45. The US dollar moved from CHF 1.0428 to CHF 1.0527. The UK pound moved from US $1.5265 to US $1.5432 for the day. The ICE Dollar Index moved the US dollar from 82.611 to 82.475.

Sterling was up significantly, more than one percent, against the US dollar. This came after the gross domestic product numbers for the second quarter in the UK were better than expected. The economy in the United Kingdom improved by 1.1 percent for the quarter. That is the fastest pace it has improved in the last four years and was significantly higher than the 0.6 percent investors had expected.