NEW YORK (Reuters) - The euro hovered near a three-week high against the dollar on Friday, chalking up its biggest weekly gain in over a year as European leaders said they would publish details about the health of European banks.
With markets a bit less anxious about Spain's public finances after the country attracted buyers for a debt auction this week, some analysts said the stress test results could boost trust in Europe's banking system.
But others cautioned that signs of trouble in the sector could put the brakes on euro gains, snapping a rally that lifted the currency 2.1 percent against the dollar this week, its best weekly performance since May 2009.
Bank stress tests "could be quite significant if they in fact show that significant capital needs to be raised by some of the major European banks," said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey. "The euro zone is by no means out of the woods."
After hitting a three-week high above $1.24 Thursday, the euro retreated to $1.2373, unchanged on the day. It was still rooted in a short-term uptrend that began after hitting $1.1876 last week, its worst level since 2006. the currency was 0.3 percent weaker at 112.26 yen while the dollar was off 0.3 percent at 90.71 yen.
Anxiety about the fiscal health of euro zone countries has eased a bit over the last week and encouraged investors to unwind bets against the single currency.
Commodity Futures Trading Commission data on Friday showed speculators cut short euro positions sharply in the week to June 15, a period in which the euro rose 3 percent against the dollar.
"We're going to see whether the euro is going to sustain these gains and press on toward $1.25," Dolan said, adding a move back below $1.2340 or so could spark some profit-taking.
BNP Paribas strategists see the euro's corrective rebound running out of steam near $1.2525, saying data suggest euro gains are "not backed by real money investment flows."
SWISS, CHINESE CURRENCIES GAIN
The euro slid to a record low at 1.3718 Swiss francs, according to Reuters data, while the dollar hit a one-month low of 1.1081 francs.
The franc gained after Switzerland's central bank on Thursday backed away from a pledge to fight currency strength and said deflation risks have receded.
The dollar index .DXY was flat at 85.737, after falling to a one-month low at 85.453. Technical analysts said it looked vulnerable after breaking through support at 85.85, with the next key level seen in the 85.13 area, its May 21 low.
The Chinese yuan rose to a one-month high against the U.S. dollar in offshore forwards as investors bet China may eventually cave in to growing pressure from the U.S. Congress to let the yuan rise in value.
Benchmark one-year non-deliverable forwards fell as far 6.6780. That implied investors were betting on a 2.2 percent rise in the yuan against the U.S. dollar over the next year, up from bets of a 1.3 percent gain on Thursday.
But Brown Brothers Harriman strategist Marc Chandler said Washington likely "lacks the leverage to get China to do something that it does not want to do."
After the 2007-09 financial crisis and the current European sovereign debt crisis, China can argue "it is a distraction to focus on the yuan," Chandler said.
(Additional reporting by Tamawa Desai in London, Editing by Chizu Nomiyama)
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