* Dollar falls as risk tolerance rises
* U.S. data bolsters optimism, trims dollar demand
* ECB's Bini Smaghi comments suggest no QE decision yet
* Swine flu fears continue to weigh on sentiment (Updates prices, adds comments)
By Gertrude Chavez-Dreyfuss
NEW YORK, April 28 (Reuters) - The dollar dropped against the euro on Tuesday as improving U.S. data trimmed demand for the greenback as a safe haven and comments by an ECB official that damped expectations for quantitative easing also weighed on the dollar against the euro.
The dollar fell after data showed the pace of decline in U.S. home prices slowed in February, suggesting the housing market may be nearing a bottom. A rise in consumer confidence in April to its highest this year also bolstered optimism about a U.S. recovery.
"There are certainly green shoots in the U.S. economy," said Robert Blake, senior currency strategist at State Street in Boston. "That's why we have seen a rise in risk appetite and a pullback in the dollar."
At the same time, European Central Bank Executive Board member Lorenzo Bini Smaghi on Tuesday doused expectations the ECB will announce non-standard measures to combat economic weakness at its policy meeting on May 7. For his remarks, click on [ID:nLS839119].
Analysts said Bini Smaghi's remarks suggested that the debate on the use of quantitative easing, or the purchase of government or corporate debt by a central bank in efforts to spur growth, was still ongoing and no decision has yet been reached.
In late afternoon trading, the euro was up 0.9 percent against the dollar at $1.3142 <EUR=>.
Investors are now looking to Wednesday's outcome of the Federal Reserve's policy-setting meeting.
Analysts at CIBC World Markets said they expect the Fed's statement to have marginal impact on currencies, although "there might be some additional insights into the Fed's expansion of its quantitative easing program."
More relevant for the FX market is Wednesday's release of the U.S. government's initial estimate of gross domestic product for the first quarter. A Reuters poll showed that analysts were expecting the U.S. economy to have contracted by an annualized rate of 4.9 percent in the first three months of the year.
YEN PRICE ACTION
Elsewhere in the market, the euro rose 0.7 percent against the yen to 126.68 yen <EURJPY=R>, after earlier hitting a seven-week low around 124.38 yen, according to Reuters data. The dollar slipped 0.3 percent against the yen to 96.38 yen <JPY=>, after falling to 95.63 yen, a one-month low.
The yen had rallied versus the euro and dollar after The Wall Street Journal reported that regulators have told Citigroup Inc (C.N: Quote, Profile,Research, Stock Buzz) and Bank of America (BAC.N: Quote, Profile,Research, Stock Buzz) that they may need to raise more capital based on early results of government stress tests on banks' ability to withstand the economic crisis [ID:nBNG118035].
Citigroup is talking to the U.S. government about its capital levels after receiving the early results of its stress test. But if it needs more capital, it does not expect the government to provide it, people familiar with the matter said. [ID:nN28304544].
In addition, worries about swine flu in Mexico persisted and should limit declines in the safe-haven dollar, analysts said. The virus has killed up to 149 people in Mexico. Milder symptoms have appeared in countries including Canada, Spain, Britain, Israel and New Zealand.
In the United States, the Centers for Disease Control said on Tuesday it had confirmed a total of 64 human cases of swine flu across the country. See [ID:nWAT011366].
The Mexican peso has been the currency hit worst by the swine flu outbreak. The peso fell to a near one-month low against the dollar <MXN=> a day after suffering its biggest tumble against the greenback since mid-October.
The peso later recovered, trading at 13.8690 to the dollar, according to Reuters data. The U.S. dollar had earlier hit a session peak at 14.135 pesos, its highest since the start of this month. (Additional reporting by Nick Olivari; Editing by Leslie Adler)