The Euro Remains Very Much A Sell. By Nicholas Hastings

A good June doesn't mean that the euro will have a good July.

On the contrary, growth prospects for the euro zone continue to deteriorate and concerns about the debt exposure of European banks continue to rise, ensuring that the single currency remains a sell.

The euro may have risen from under $1.19 at the start of this month to over $1.25 at the start of this week. However, most of the gains were driven by short-covering rather than anything else.

See how the euro's June rally has faltered:



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By the time China announced the release of its yuan peg against the dollar last weekend, the euro was able to just barely benefit from the improvement in global risk sentiment.

By then, speculative shorts had been squeezed out and recent gains in the one-month euro/dollar risk reversals in the options market had stalled.

"Confidence in an early recovery of the euro may be misplaced," is how Michael Hart, a currency strategist with Citigroup, put it.

On the one hand, there is rising evidence that the euro zone's economic recovery will falter.

A stronger-than-expected Ifo survey of German business confidence Tuesday lifted fears that the problems of peripheral euro zone members are spilling over into the stronger core economies. But, these fears were only lifted briefly.

With the survey also showing a decline in business expectations for a second month in a row, the outlook for the region hardly looks good.

Economists at ING Financial Markets said that although the euro zone may have achieved "decent" growth in the first half of the year, leading indicators suggest that a "double dip" recession is still a serious possibility.

The second reason for selling the euro is the rising concern about the health of major European banks.

Fitch's surprise decision to downgrade BNP Paribas and Standard & Poor's warning about the health of Spanish lenders helped to focus market attention on the stress tests that central banks are conducting on the region's major banks.

There is growing pressure for the tests to be expanded beyond the region's 25 major banks in an effort to reassure financial markets and ease funding pressures for European financial institutions in general.

Until these results are published in July, confidence in European banks is likely to remain low and the euro's role as a global reserve currency is only likely to diminish.

So, even if the recent China-related rally in risk appetite had lasted, the euro would probably have fallen back anyway as other traditional risk currencies, such as the Australian and New Zealand dollars, benefited instead.

As Daragh Maher, deputy head of global foreign exchange strategy at Credit Agricole in London, said: "The channels to capitalize on this remain outside the euro zone."

Early Wednesday the euro was flat, showing little clear direction, like most other major currencies.

Global sentiment was fairly negative, with stock markets sliding after U.S. existing home sales disappointed market expectations. Another decline in the Chinese yuan also didn't help matters, with further indications that state-controlled Chinese banks were buying the dollar to prevent the yuan from rising again.

The dollar Wednesday fixed up at CNY6.8102 from CNY6.7980 on Tuesday.

By 0645 GMT, the euro was at $1.2275 compared with $1.2277 late on Tuesday in New York, according to EBS. It was also flat at Y110.98.

The dollar was up marginally at Y90.42 from Y90.39.