Dollar recovers after EU stress tests

NEW YORK (CNNMoney.com) -- Investors are considering European stress test results, as stocks remain volatile, worries about a sluggish U.S. economic recovery persist and confidence in the euro zone and nations abroad increases.

A string of disappointing economic reports this week, along with pessimistic comments from Federal Reserve Chairman Ben Bernanke about an "unusually uncertain" outlook for the U.S. economy, have caused investors to fear that the recovery is stalling.

Meanwhile, with only seven European banks failing the stress test, other data from the euro zone and the U.K. has highlighted strength in overseas economies, making the euro and the British pound increasingly attractive and limiting the appeal of the safe-haven dollar.

Stocks have been choppy, tumbling on Wednesday and staging a comeback on Thursday and Friday. Up until the release of the stress test results on Friday, the greenback hovered near 2-month lows versus the euro and the British pound and 8-month lows versus the Japanese yen earlier this week.

"We are seeing upside surprises in other countries," said Kathy Lien, director of currency research at Global Forex Trading. "So far this month, the euro has risen 5.3%, and part of this is due to improvement in the European economy and part of it is due to the pessimism of the Federal Reserve."

The results of stress tests of major European banks were released Friday, and investors are watching closely to gauge the health of the euro zone's banking system.

Because the dollar's relationship with the Japanese yen tends to be the relationship most based on dollar fundamentals and the long-term outlook of the U.S. economy, the greenback's inability to advance versus the yen earlier this week is telling of the current slump in investor sentiment.

"The dollar's most significant weakness can be seen in the dollar-yen and its inability to rally," said Lien. "Bernanke reinforced fears that growth in the second quarter is not going to be as strong as anticipated, making people realize that maybe there are more troubles in the U.S. economy than initially thought and that it isn't improving at the pace we had hoped."

Because confidence about the economy has seemed to hit a wall -- with this week's disappointing reports on employment, construction and home sales only dragging sentiment lower -- Lien said she thinks it will be very difficult for the dollar to make a substantial comeback versus any of the major currencies.

"All of the data we've had recently tell us that more strains are to come for the U.S. economy, and that we should be ready for it to get worse before it gets better," she said.