The euro strengthened for a third day against the yen as Italian lawmakers prepared for a confidence vote on an austerity package and before the release of stress tests on European banks. The greenback headed for a second weekly loss against the Swiss franc after S&P said there’s at least a 50 percent chance it will cut the AAA rating within 90 days on risks a stalemate will endure beyond any near-term deal to raise the debt limit.

“Uncertainty about the credit rating and debt-ceiling talk will continue weighing on the dollar,” said Toshiya Yamauchi, a senior currency analyst in Tokyo at Ueda Harlow Ltd., which provides foreign-exchange margin-trading services. “The market has a negative view for the dollar.”

The dollar traded at 79.20 yen as of 7:10 a.m. in London from 79.14 yen in New York, headed for a 1.8 percent drop this week, the biggest decline since the five-day period ended April 15. It was at $1.4159 per euro from $1.4143 yesterday. The U.S. currency bought 81.58 Swiss centimes, having declined 2.5 percent this week. The euro climbed 0.2 percent to 112.13 yen.

S&P may lower the U.S.’s long-term rating by one or more notches into the AA category if it concludes Congress and President Barack Obama’s administration haven’t achieved a credible solution to the rising government debt burden and aren’t likely to achieve one in the near future, the company said in a statement dated yesterday.

Moody’s Investors Service put the U.S. Aaa credit rating on review for a downgrade on July 13, citing concern officials won’t raise the nation’s $14.3 trillion debt limit in time to prevent a missed payment.

There’s “no way to give Congress more time” on lifting the debt limit, Treasury Secretary Timothy F. Geithner said after meeting with Democratic lawmakers on Capitol Hill in Washington. He has repeatedly said the U.S.’s borrowing authority will end on Aug. 2 without congressional action.

Ten-year Treasury yields were little changed at 2.95 percent, after falling to this year’s low of 2.81 percent earlier this week. The 10-year average is 4.06 percent.

The dollar weakened against 10 of its 16 most-traded peers before a U.S. report that economists said will show the cost of living fell in June for the first time in a year, allowing the Federal Reserve to maintain record stimulus without worrying about inflation.

The consumer-price index decreased 0.1 percent, after a 0.2 percent gain in May, according to economists surveyed by Bloomberg News. The so-called core measure, which excludes more volatile food and energy costs, increased 0.2 percent, the survey showed.

The Fed is prepared to take additional action, including buying more government bonds, if the economy appears to be in danger of stalling, central bank Chairman Ben S. Bernanke said July 13. The central bank ended its $600 billion bond-buying program, also called quantitative easing, last month.

“I don’t think QE3 is off the table, and certainly, if there is any opportunity for Bernanke to print money he would do it,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “If we see a softer CPI number over the next couple of months, that would be a catalyst” for dollar weakness.

The euro pared this week’s decline against the yen to 2.5 percent before Italian Prime Minister Silvio Berlusconi today faces a final confidence vote on an austerity package that aims to balance the budget in 2014 and shield the nation from the region’s debt crisis. The Chamber of Deputies holds a vote at about 7 p.m. local time to secure final passage of the measure.

The European Banking Authority will release the results of the stress tests for 91 banks as part of an effort to reassure investors the region’s banks have sufficient capital. The assessments are the first by the EBA since it was set up earlier this year. The results will be published from 5 p.m. U.K. time.

“Berlusconi will likely pass the final confidence vote on the austerity plan and that will ease market fears that Italy will be another Greece,” said Masahide Tanaka, a senior strategist in Tokyo at Mizuho Trust & Banking Co. “We’ll get the results of stress tests too, which are likely to reduce uncertainty over the region’s banking system. Those may be reasons for buying-back of the euro.”

The EBA can’t force banks to take part, and can’t test for a sovereign default, which policy makers are struggling to avoid.

The yen fell against 12 of its 16 major peers after Japan’s Finance Minister Yoshihiko Noda said he’s watching markets carefully because the currency’s moves have been “one-sided” in the last few days, fueling concern authorities will intervene to sell Japan’s currency to support exporters. Policy makers need to be mindful of the yen’s impact on the economy including corporate sentiment, Noda told reporters today in Tokyo