Euro weakens on political gridlock

European banking stress tests found only eight banks in need of a capital injection but the results have left many concluding that more will ultimately need to bolster their positions. The euro reached another record low against the Swiss franc after ECB President Trichet repeated his warning that the central bank wouldn't tolerate any restructuring of Greek debt and would no longer be permitted to accept as collateral paper issued by Athens. He also predicted that the euro would survive upon the will of European finance ministers. However, the failure to deliver any single shred of a breakthrough has left dealers preparing to throw in the towel on the euro ahead of another EU summit on Thursday to review the zone's “financial stability.”

Euro – The euro fell the hardest in a week following the stress tests that saw only eight failures that would require a meager €2.5 billion in additional capital. Yet investors took a dim view on the outlook for the banking sector and sold banking stocks. European bourses are down on risk aversion with ban stocks falling twice as hard as key benchmarks. Confidence is once again abandoning the single currency with investors again bracing for a run on the unit below $1.4000 following a recovery last week to as high as $1.4256. The Swiss franc took full advantage of weakness in the fortunes of the euro rising to Sfr1.1405.

U.S. Dollar – The resurgent European threat from spreading sovereign debt problems is once again providing a boost for the U.S. dollar. Today the index has recovered towards its best level in three days as investors look to the greenback for a better alternative to Europe's single currency. The dollar's value against a basket of its major trading partners rose by 0.5% to 75.65. Last week sentiment turned towards the dollar after Fed Chief Bernanke made plain the fact that although the FOMC stood ready to dish out more policy solutions for the struggling economy, he didn't feel it was necessary yet. This supporting factor has warmed investors to the greenback easing concerns of further quantitative easing in the near-term.

Aussie dollar – The Aussie slumped on renewed risk aversion, which has resurfaced with such frequency that the yield curve has recently changed its shape enough to rob the Aussie of its typical wave of support. With the world's largest economy struggling with finding sufficient traction within its recovery to put the nation's army of unemployed back to work, and with Australia's largest trading partner successfully slowing the economy of the world's most populous nation, investors are left wondering where all the growth will come from. On Tuesday the Reserve Bank will publish the minutes of its July meeting. With investors growing more risk averse by the minute, dealers are concerned that the minutes will reveal language that could undermine the Aussie should the conversation swing to a monetary easing. The Aussie fell again on Monday to trade at $1.0607 U.S. cents, while it also fell against the yen to ¥83.94.

Canadian dollar – The U.S. dollar advanced against the Canadian dollar to trade around 0.5% higher with each Canadian unit buying $1.0413 U.S. cents. As with the Aussie dollar, investors are lowering their expectations for Canadian central bankers' desire to raise interest rates to either restrain domestic growth or inflation in a harsh global environment.

Japanese yen – The dollar traded marginally lower against the Japanese yen although the pair remained within a narrow range during a holiday for the Asian nation. Financial markets were closed. The dollar eased to ¥79.09 while the euro lost 0.5% against the yen to ¥111.40.

British pound – The pound eased after a July Rightmove home price report revealed an acceleration in the dip in U.K. home values. Sellers lowered the aggregate cost of homes for sale during July by 1.6% during the month after prices rose by 0.6% in June. The yearly pace of increase diminished to 0.1% as a result as the property market struggles. The pound fell against the dollar and remains lower at $1.6097 as equity prices weaken. Against the euro the pound rose to its highest in a month against a languishing euro to trade at 87.44 pence.