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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).
“They haven’t resolved the broader issues that have emerged and there will be question marks over the stress tests and the pressure on the euro in the near term is likely to downward more than up,” said Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York. “Investors are a lot more skeptical with these tests and there is going to be a lot of work to analysis the financials of the banks in the context that the market has moved way beyond what they were assuming in the stress test.”
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.
The U.S. currency strengthened earlier after a report showed U.S. consumer prices excluding food and energy increased for a second month, cutting chances of additional stimulus from the Federal Reserve. The Dollar Index had slumped earlier after Standard & Poor’s said there’s a 50 percent chance the U.S. will lose its top credit rating even if Congress reaches agreement on raising the debt ceiling to stave off a default.
The core measure of the cost of living in the U.S., which excludes more volatile food and energy costs, increased 0.3 percent for a second month. Economists projected the core gauge would rise 0.2 percent.
Federal Reserve Chairman Ben S. Bernanke told Congress yesterday that inflation has moved higher, boosting speculation the central bank won’t take further steps to support the U.S. economy.
“Having a slightly high reading of core inflation is something that grabbed the attention of the market today, which is our reason why the dollar should be benefiting after Bernanke’s speech that raised the idea that we could have more easing or the beginning of an exit,” said David Mann, regional head of research for the Americas at Standard Chartered Plc in New York.
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