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Tuesday May 5, 2009 - 11:17:43 GMT
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FOREX NEWS-Euro/dlr hits 1-mth high, boosted by risk demand

Tue May 5, 2009 6:09am EDT

* Euro/dollar hovers near 1-mth high hit in early trade

* Share gains, data boost view for economic recovery

* Bank stress test result concerns may cool risk demand

(Adds comment, updates throughout)

By Naomi Tajitsu

LONDON, May 5 (Reuters) - The euro hit a one-month high against the dollar on Tuesday as higher global shares added to the view that the worst of the economic downturn may have passed, spurring more demand for currencies perceived to be higher risk.

A 3 percent climb in UK share markets .FTSE helped to spur the ongoing improvement in risk demand, pushing sterling to a four-month high against the dollar.

The euro rose as high as $1.3439 on electronic trading platform EBS, its highest since early April, although anticipated results of U.S. bank stress tests later this week capped a climb higher, traders said.

Analysts said data this week showing improving manufacturing in Europe, China and India, and an unexpected rise in U.S. existing homes sales added to the view that the global economy may have past the worst after months of intense weakness.

"Risk is still on, that's the general theme," said Martin McMahon, currency strategist at Credit Suisse in Zurich. "It's general confidence that the recovery is coming everywhere. All of the data is coming through moderately positive."

This helped to push European shares .FTEU3 1.4 percent higher on Tuesday. A recovery in global stocks have improved risk appetite in past months, boosting the euro, sterling and high-yielders including the Australian and New Zealand dollars.

Still, some in the market said the risk rally sputter if stress tests results due on Thursday show U.S. banks may need significantly more capital to deal with ongoing weakness in the global financial system.

A source told Reuters about 10 banks would be told they needed to increase their capital cushions. [ID:nN04395186]

Investors were also wary of taking on too much risk ahead of separate policy announcements by the European Central Bank and the Bank of England on Thursday.

The ECB is expected to cut its main interest rate by 25 basis points to a record low 1 percent, while the BoE is seen holding rates at a record low 0.5 percent. Markets are waiting to see whether the ECB will suggest if it plans to keep cutting rates, and if it refers to "non-conventional" policy measures to deal with weakness in the euro zone economy.

Sterling <GBP=D4> traded 0.4 percent at $1.5078. The pair climbed as high as $1.5112, its highest level since January, as UK market participants returned from a holiday on Monday.

The dollar index .DXY rose 0.2 percent to around 83.790, but hovered close to 83.600 hit against a basket of currencies on Monday, the first time since late March.

The dollar inched up to 99.10 yen <JPY=>. They yen was on the back foot against other currencies, relinquishing early gains against the euro <EURJPY=R>. The pair traded at 132.66 yen, unchanged on the day.

The yen slipped broadly, pushing the higher-yielding Australian <AUDJPY=R> and New Zealand <NZDJPY=R> dollars each roughly 1 percent higher.

Improving risk appetite tends to put downward pressure on the dollar and the yen, which are widely considered safer trading bets in times of uncertainty.

Analysts said that given the possible return of the risk demand trend had made markets more sensitive to evidence pointing to improving global economic conditions, even as any recovery is seen taking time.

This view may keep the dollar and the yen under selling pressure, they added."

"Markets appear to be Teflon coated lately, with bad news not sticking for long," analysts at Calyon said in a research note.

"This suggests that global equities, commodities and carry trades are likely to continue to find support whilst safe haven such as Treasuries and currencies including the yen and dollar, will continue to face pressure in the short-term." The Australian dollar <AUD=D4> rose around 0.7 percent to a seven-month high of $0.7464 after the Reserve Bank of Australia on Tuesday kept its benchmark cash rate on hold at a record low of 3.0 percent, rather than cutting it [nSYD363232]. (Editing by Victoria Main)

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