Banks led losses for European shares and the euro fell on Friday as investors worried financial sector stress tests will throw up some unwanted surprises to add to the region's debt crisis.
Greece, Spain and Italy's government bond yields also rose, though relatively safer German Bunds were in demand, with the 10-year yields down 4.2 basis points .
Gold eased after hitting a record high in the previous sessions. The precious metal has been driven higher by the concerns over US and euro zone debt and on raised expectations of further bond buying by the Federal Reserve, although Fed Chairman Ben Bernanke on Thursday backed off hints of additional near-term stimulus.
The dollar steadied after suffering a brief sell-off after ratings agency Standard & Poor's said it could cut US credit rating, a day after similar warning from Moody's Investors Service.
S&P warned there was a one-in-two chance it could cut US ratings if no deal was reached on raising the government's debt ceiling.
“We have still got a cocktail of uncertainties for investors,” said Keith Bowman, equity analyst at Hargreaves Lansdown.
“The situation in Europe is still very difficult to forecast, we had another warning over the US credit position and on the top of all that we have got the bank stress test results to come later today.”
European banks lost 0.9 percent, with Spanish banks down 1.3 percent.
The FTSEurofirst 300 index of leading European shares fell 0.5 percent, helping take the MSCI All-Country World Index 0.3 percent lower. In Asia, Japan's Nikkei average closed 0.4 percent higher.
DEBT STRESS
The European Banking Authority test results are expected to show that around 10 banks have insufficient capital to withstand a prolonged recession.
Results of the tests on 90 banks from across the European Union are expected at 1600 GMT, followed by a news conference at 1630 GMT. They test for a “deterioration” in sovereign debt markets compared to May.
“Given the current problems in Europe it is questionable how valuable these stress tests will be,” said Michael Hewson, market strategist at CMC Markets.
“If they are too weak they will lack credibility, just like last year's did, and if they reveal too many problems that could well set off the contagion so many European leaders fear.”
The euro was down 0.2 percent at $1.4142 and down 0.1 percent at 1.1527 Swiss francs , while the dollar was up 0.1 percent at 79.20 yen and 0.1 percent against a basket of currencies .
“We think EUR/CHF may be the cleanest vehicle to express a bearish view on eurozone systemic tension,” Nomura said in a note.
“The challenge posed by the turmoil in the Italian bond market is sustainable and in our view, the euro is set to underperform as long as bond market tension in Italy and Spain persists.”
Yields on 10-year Greek government bonds rose 27.5 basis points to 17.456 percent, not too far from their euro lifetime high of 18.9 percent, while those on 10-year Italian government bonds rose 6 basis points to 5.717 percent after topping 6 percent earlier this week for the first time since the launch of the euro.
Gold eased 0.6 percent though hovering near a record high of $1,594.16 an ounce hit on Thursday.
Brent crude slipped 0.5 percent to trade below $116 a barrel, while copper prices dipped 0.2 percent to trade above $9,600 a tonne.
Yields on 10-year benchmark US Treasuries were down 1.5 basis points at 2.9386 percent. - Reuters