Euro comes safely through ECB stress test, Aussie up

27/10/2014 08:37 AST

(Reuters) - The euro held firm on Monday after the European Central Bank's stress tests found smaller capital shortfalls among European banks than expected, lending a tailwind to the recovery in risk sentiment over the past week.

Twenty-five out of the euro zone's 130 top lenders failed landmark health checks at the end of last year but most have since repaired their finances, the ECB said on Sunday.

Painting a brighter picture than had been expected, the ECB concluded that banks' capital holes had chiefly been plugged, leaving only a modest 10 billion euros to be raised.

"Their capital shortage was at the lower end of market expectations, which is positive for risk sentiment," said a trader at a major Japanese bank.

The euro gained 0.3 percent to $1.2707 EUR= extending its recovery from two-week low of $1.2614 set on Thursday. The common currency also briefly rose to 137.48 yen EURJPY=R, its highest level in more than two weeks.

The growth-linked Australian dollar also gained as upbeat corporate earnings from big U.S big names boosted risk sentiment, helping MSCI's world stock index .MIWD00000PUS to post the biggest gains in more than a year after four straight weeks of losses.

The Aussie rose 0.3 percent to stand at $0.8816 AUD=D4. Against the yen, it reached as high as 95.31 yen AUDJPY=R, its strongest in over two weeks.

Rising risk appetite hit the low-yielding yen before month-end yen-buying by Tokyo exporters lifted it.

The dollar rose to as high as 108.38 JPY=, its highest level since Oct 8 before edging back to 107.90 yen, down 0.2 percent from late U.S. levels last week.

Still, moves in early Monday trade were limited overall, due to lingering concerns on the state of the global economy as Europe, China and Japan all appear to suffer one problem or another.

Although fears of possible recession in the euro zone eased slightly after a surprisingly strong business survey last week, few investors think Europe is out of woods.

Traders will be looking to Germany's Ifo business sentiment index due at 10:00 a.m. BST on Monday. ECONDE Economists expect a slight fall in business morale.

Looking further ahead, policy meetings by the U.S. Federal Reserve and the Bank of Japan later this week attract attention on clues on how they perceive latest threats to the economy. "The Fed will likely end its bond buying while maintaining its pledge to leave rates near zero for a considerable time. That should underpin risk assets and hamper the yen," said Minori Uchida, chief FX strategist at the Bank of Mitsubishi-Tokyo UFJ.

Elsewhere, the Brazilian real's non-deliverable forwards showed a muted response so far after leftist President Dilma Rousseff narrowly won re-election on Sunday.

Investors have generally disliked Rousseff's interventionist management of state-run companies and other sectors of the economy, but some traders think her re-election is already priced in as the real BRL= has fallen nearly 10 percent since early September.

Reuters