* Euro close to 2-month peak, just above $1.30
* Strong UBS results, equity gains encourage risk demand
* Dollar, yen fall; Aussie, kiwi, sterling all perform well
(Updates prices, adds quotes)
By Jessica Mortimer
LONDON, July 27 (Reuters) - The euro hovered close to a two-month peak against the dollar and hit a seven-week high against the yen on Tuesday as solid bank earnings lifted equities and encouraged investors to take on more risk.
Strong earnings from Swiss bank UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz) helped lift European shares .FTEU3 0.7 percent, with banking stocks up more than 4 percent, justifying the market's relief that last week's European bank stress tests revealed no horrors.
This was another reason to sell the dollar for the euro and higher-yielding currencies as recent weak U.S. economic data, contrasting with better data from Europe and Asia, pushed the U.S. unit to a 12-week low versus a basket of currencies.
"The risk environment is more encouraging and equities are performing a bit better, which is weighing on the dollar while risk currencies like the Australian and New Zealand dollars are performing well," said ING currency strategist Tom Levinson.
At 1028 GMT, the euro was up 0.1 percent at $1.3008, close to last week's more than two-month peak of $1.3029. Traders said offers above $1.30 on behalf of a European sovereign helped cap gains, though Asian central bank demand was seen below $1.30.
If it breaks its recent high, the next target for the euro -- which has risen close to 10 percent since it fell below $1.20 seven weeks ago -- will be $1.3125, the 38.2 percent retracement of its December-June fall, technical analysts said.
"In the near term, the euro could go higher, although at the moment it is stuck below last week's high," ING's Levinson said, adding that weak U.S. consumer confidence data due later on Tuesday could provide a catalyst for a move higher. ECONUS
Falls were also seen limited while it remained above support at $1.2870 -- close to its 100-day moving average -- and last week's low around $1.2730.
The recent run of better euro zone data continued on Tuesday, with above-forecast euro zone money supply and German consumer confidence figures. [ID:nLDE66Q0O4] [ID:nLDE66P1NX]
Against a basket of currencies, the dollar .DXY fell 0.1 percent to 82.029, having hit a 12-week low of 81.913.
Better appetite for risk also weighed on the low-yielding Japanese yen, with the euro EURJPY=R rising to a seven-week high around 113.74 yen.
RISK CURRENCIES RISE
Underscoring a brighter global outlook, India hiked interest rates on Tuesday [ID:nSGE66Q06N], citing inflationary pressures and a firm economic recovery, while the Reserve Bank of New Zealand is expected to raise rates later this week.
Among perceived higher risk currencies, the New Zealand dollar NZD=D4 hit a six-month high against the U.S. dollar, the Australian dollar AUD=D4 rose to an 11-week high while sterling GBP=D4 hit its strongest level in five months.
"The market has drifted away from fears of a double dip, and the rate tightening environment -- with a rate hike in India and one expected in New Zealand -- is attracting flows into higher yielding and emerging market assets and out of the dollar," said Peter Frank, currency strategist at Societe Generale.