* Euro pulls back from two-month high against dollar
* Market looking to start of U.S. quarterly earnings
* Yen slips, then recovers after Japan election results
(Updates prices, adds comment, adds detail)
By Steven C. Johnson
NEW YORK, July 12 (Reuters) - The euro retreated on Monday
from a two-month peak against the dollar as investors said the
currency was overbought ahead of European bank stress test
results due next week.
The yen struggled in overnight trade after Japan's ruling
party suffered a stinging defeat in a weekend parliamentary
election but recouped its losses during North American trade.
Some market participants said the euro took a hit after a
German magazine reported over the weekend that the bank stress
tests would, under certain conditions, include loan markdowns
on German sovereign debt. That clashed with reports last week
that the tests would exempt German haircuts. []
Technical factors also held the euro in check, particularly
its failure to rise above a downtrend line drawn through the
currency's December high. The currency was last trading at
$1.2592 <EUR=>, down 0.4 percent, and resistance was seen just
above $1.27, around a two-month high touched on Friday.
Traders reported Asian demand around the day's lows at
$1.2550 with automatic stop-loss orders lurking just below.
Stronger bids are seen around an approach of $1.25.
Debt woes in Greece and fears about bank exposure to
troubled euro zone countries in June drove the euro to a
multiyear trough below $1.19 before staging a corrective rally.
The euro is still off 12 percent against the dollar in 2010.
"We're still generally in correction mode, but we remain
pretty negative on the euro in the second half of the year,"
said Shaun Osborne, strategist at TD Securities in Toronto.
"There's still some upside potential, but after retesting
and failing to break the trendline, we've seen some negative
price action, and I think you'll see the euro settle into a
$1.23-$1.27 range for a while longer."
Details of the stress tests on 91 European banks are due on
July 23 as the European Union seeks to restore confidence in
the sector. []
If the stress tests are deemed insufficiently severe,
markets are likely to punish the euro and fear the worst about
Europe's banks, Osborne said. "The tests must be realistic," he
said.
Data showed speculative bets against the euro were trimmed
last week, and some analysts say that may leave room for
investors to start rebuilding euro shorts. []
YEN RECOVERS, STERLING WOBBLES
Against the yen, the dollar was unchanged at 88.59 yen
<JPY=>, having climbed as high as around 89.15 yen after Prime
Minister Naoto Kan's Democratic Party of Japan (DPJ), lost its
upper house majority in an election on Sunday, putting at risk
efforts to deal with the country's debt.
Tokyo traders said the election outcome initially sparked
unwinding in long yen positions, which rose sharply last week.
Sterling fell 0.3 percent to $1.5020 <GBP=D4> after ratings
agency Standard & Poor's affirmed the UK's "AAA" long-term
rating but maintained a negative outlook. []
Markets were looking ahead to second-quarter earnings
results from U.S. firms, with Alcoa Inc. reporting on Monday. A
recent string of weak U.S. economic data has raised speculation
the recovery may be losing momentum and has hurt the dollar.
Those fears also helped the yen recover its post-election
losses, as the currency tends to rise when investors grow
averse to risk and unwind trades financed with borrowed yen.
But Boris Schlossberg, a director for currency research at
GFT Forex, said that if U.S. company earnings this week suggest
interest rates are likely to rebound off their recent lows, the
dollar will move higher against the yen irrespective of
political uncertainty surrounding Kan and the DPJ.
(Additional reporting by Vivianne Rodrigues; Editing by Leslie
Adler)
