Stress tests weigh on euro

The euro has lost ground against the US dollar after the news that eurozone banks will be subject to stricter regulation.

EUR/USD is under pressure today, since the European Central Bank (ECB) mapped out plans to introduce tougher criteria for banks operating in the eurozone. The aim of the initiative is to strengthen the banking system and make it more transparent. European banks will be required to hold more capital for precautionary reasons: the ECB would not like to see a repeat of the banking crisis, in which we saw banks being bailed out. In the long term, the policy is likely to have a positive impact on the region. However, in the short term it restricts the way banks operate, and this has prompted traders to sell the euro.

Yesterday the euro almost reached a two-year high versus the US dollar. Weaker-than-expected non-farm payrolls from the US encouraged traders to buy the European currency, as they felt the Federal Reserve is less likely to trim its stimulus package in 2013. Some dealers began to take their profit overnight, and the ECB announcement is encouraging others to follow suit.

Spot FX EUR/USD chart

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