* Several Spanish savings banks fail stress tests -newspaper
* Test results expected around 1600 GMT
* Euro/dollar risk reversals show bias for euro puts
By Rika Otsuka
TOKYO, July 23 (Reuters) - The euro slipped against the
dollar and the yen on Friday after a newspaper said several
Spanish savings banks failed tests to see how they would cope
with worsened economic conditions.
The euro hit the day's low of $1.2861 <EUR=> on trading
platform EBS after Spanish newspaper El Pais reported on Friday
that several of the country's 18 savings banks have failed the
so-called stress tests. []
But losses were limited in the single currency, which jumped
more than 1 percent against the greenback on Thursday, as many
investors awaited the official test results at about 1600 GMT.
The euro has support at about $1.2720, an interim high from
July 9 set during its recent rally from a four-year low, and is
consolidating at $1.2720-1.3030. A break above that band could
see it testing $1.3090-1.3125, chartists say.
But traders said the euro was unlikely to re-test this week's
10-week high of $1.3029 just yet nor fall sharply ahead of the
stress test results, which could move other currencies as well.
Traders have been betting most of the 91 European banks being
examined will pass. Analysts say if there are no ugly surprises,
that will be euro supportive, although some are sceptical about
the severity of the checks.
"Unless test results show a surprisingly big number of banks
needing surprisingly large amounts of money to mend their health,
the results are expected to be euro supportive," said Jun Kato,
senior manager of the investment department at Shinkin Asset
Management, adding that there was no sense of panic following the
Spanish newspaper report.
Euro bulls bet the euro could extend its rally partly on
dollar weakness due to concerns the U.S. recovery is faltering.
Below-forecast economic data has fanned fears about a slowing
economy, prompting investors to dump long dollar positions.
For chartists, the $1.3090 target area is a spike higher on
May 10, while $1.3125 is the 32.8 percent retracement of the
euro's fall from its November high to the four-year low marked in
June.
But bears bet the euro rally could lose steam, pressured by
selling against currencies with higher interest rate prospects,
such as the Australian <EURAUD=R> and Canadian dollars
<EURCAD=R>.
Chartists say a breach of $1.2720 support could be the first
warning of a deeper retracement from its 10-week high.
Euro/dollar 1-month risk reversals <EUR1MRR=ICAP>, a measure
of currency sentiment, showed a bias for euro puts. Traders said
that partly reflected speculation the euro may start falling
sometime after the test results.
Data from broker ICAP <EURVOL=ICAP> shows euro/dollar 1-month
risk reversals at 1.35/1.85 percent, around the highest in more
than three weeks.
The yen has been under pressure after data on Thursday showed
surprisingly robust growth in European manufacturing and
services, and after strong earnings from U.S. blue chips such as
3M <MMM.N> and Caterpillar <CAT.N> rekindled hopes for the global
economy and improved investor appetite for risk.
The euro was flat at 112.07 yen <EURJPY=R>, having risen
about 0.9 percent on Thursday. It fell to the day's low of 111.73
after the Spanish newspaper report.
The dollar edged up 0.2 percent to 87.09 yen <JPY=>, staying
above a seven-month trough of 86.27 yen struck on trading
platform EBS late last week. The greenback dipped 0.1 percent
against the Japanese currency on Thursday.
(Additional contribution by Reuters FX analyst Rick Lloyd in
Singapore and Krishna Kumar in Sydney; Editing by Charlotte
Cooper)
