* European bank stress tests show 8 failures out of 90
* U.S. consumer sentiment worsens in July
* Swiss franc seen good hedge vs euro, dollar (Updates prices, adds quotes and graphics, changes byline)
By Julie Haviv
NEW YORK, July 15 (Reuters) - The euro traded unchanged against the dollar on Friday as investors shrugged off European bank stress-test results and remained focused on contagion risks of peripheral debt.
Europe's banks grabbed the spotlight in the afternoon when the European Banking Authority released its widely anticipated stress-test results, showing eight banks failed a test of their ability to withstand a prolonged recession. For story [ID:nL6E7IF19G] [ID:nBANKTESTS]
The stress test made on 90 lenders came in slightly below expectations that around 10 to 15 lenders would fail.
"To be honest, I am pretty skeptical of the results and find it hard to believe that only 8 failed," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
"Furthermore, the assumptions used are not as realistic as they could have been, and they did not discount for haircuts on Greece or other sovereign debt."
In early afternoon New York trading, the euro
The more investors fear that heavily indebted euro-zone governments will be unable to repay their debts, the more the yields on their bonds rise, dragging down their value in banks' balance sheets, erasing their capital, and increasing the need for yet more bank bailouts by stronger euro-zone governments. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Euro zone debt crisis: http://r.reuters.com/hyb65p
TAKE A LOOK: European bank stress tests
[ID:nL6E7IE0W0] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
An unexpected contraction in a New York state manufacturing index in July and a drop in U.S. consumer sentiment had earlier boosted the safe-haven greenback. For a wrap-up of U.S. economic data, see [ID:nN1E76E0B9].
The ICE dollar index <.DXY> was last down 0.1 percent at 75.147. The core reading of the U.S. Consumer Price Index for June was up 0.3 percent, higher than forecast, but that did not hurt the dollar. The data suggested another round of Federal Reserve quantitative easing was not imminent.
The impasse on the U.S. debt ceiling talks should remain a headwind for the U.S. dollar. Standard & Poor's earlier said there was a one-in-two chance it could cut the United States' credit ratings if no deal was reached on raising the government's debt ceiling. [ID:nL3E7IF03A]
The euro's outlook was also shaky on worries about whether Europe could find a solution to the debt crisis in Greece and prevent contagion to larger countries such as Italy, highlighted by the rising cost of insuring peripheral euro- zone debt against default. [GVD/EUR]
With prospects for both the euro and dollar muddied by major concerns about debt in the euro zone and the United States, some analysts recommended buying the safe-haven Swiss franc as a hedge against risks to both the euro and the dollar.
Implied volatility in euro/Swiss one-month implied vols
Shaun Osborne, chief currency strategist at TD Securities in Toronto, favored buying the Swedish krona against the euro. The euro was nearly unchanged at 9.1948 krona
"The outlook for higher rates, large current account surpluses, firm growth and local tolerance for (krona) appreciation suggest that its recent slump versus the euro should start to reverse." (Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Jan Paschal)