* Euro hits day's low after weak Portugal auction results
* Investors await Bernanke for monetary policy view
* Bernanke to set mkt tone before Europe stress test results
(Adds quote, updates prices)
By Jessica Mortimer
LONDON, July 21 (Reuters) - The euro slipped against the
dollar on Wednesday after weak demand at an auction of
Portuguese debt highlighted the fragility of the euro zone
banking sector ahead of European bank stress test results later
in the week.
The euro extended losses after the auction, dipping just
below $1.28 following earlier reports of quasi-official selling
around the $1.29 level, as investors awaited testimony from
Federal Reserve Chairman Ben Bernanke.
Portugal sold 1.25 billion euros in 12-month Treasury bills,
but the average yield more than doubled from the previous sale,
while the bid-to-cover ratio was much lower. []
"The euro is correcting lower as a result of the Portuguese
auction," said Michael Hewson, currency strategist at CMC
Markets.
"It doesn't take much to sow seeds of doubt in the euro."
But analysts said Bernanke's testimony, which begins at 1800
GMT, is likely to set the tone in terms of euro/dollar
sentiment, with investors looking for any remark that could
boost speculation of more U.S. monetary easing. []
"The European stress test results will be seen in light of
the market sentiment at the time, which will be set by
Bernanke," said Gavin Friend, currency strategist at nabCapital
in London.
By 1139 GMT, the euro <EUR=> was down 0.5 percent on the day
at $1.2817, having hit a session low of $1.2791, stopping just
short of its 200 hour moving average around $1.2787.
The 50 percent retracement of the euro's peak-to-trough move
in April-June lies at $1.2783, according to Reuters data, while
trendline support drawn from lows hit so far this month came in
at $1.2757 on Wednesday.
The euro fell broadly, losing more than 1.0 percent against
the yen <EURJPY=R>, 0.5 percent versus sterling <EURGBP=D4> and
around 0.75 percent against the Swiss franc <EURCHF=>.
But its downside was limited as a 1.6 percent rise in
European shares <> suggested some demand for riskier
assets.
YEN GAINS
The dollar <JPY=> slipped 0.6 percent to 86.95 yen on
selling by Japanese exporters. It hovered near a seven-month
trough of 86.27 yen on EBS late last week.
The dollar is struggling as expectations of a Fed rate rise
in 2011 fade, while speculation about more easing has grown
after weak U.S data. []
The two-year U.S. Treasury note yield hit a record low of
0.57 percent on Tuesday, about 20 basis points less than the
yield on two-year German bonds. Until less than a month ago,
U.S. notes yielded more than German debt. []
Analysts said euro movements may be limited before the
results of bank stress tests as they may show how European banks
would cope with weakness in the region's economy. However, some
analysts said investors may not be convinced by the results if
the test criteria are considered to be too lax.
"The credibility of the stress test will crucially depend on
applied sovereign hair cut ratios and too much of a fudge
on this side will not bode well for the euro," analysts at BNP
Paribas said in a note.
Sterling was down 0.1 percent at $1.5256 <GBP=D4>, recouping
losses after falling sharply due to an erroneous trade.
(Additional reporting by Naomi Tajitsu; Editing by Toby
Chopra)
