* Euro hits one-month high but retreats ahead of ECB
* U.S. bank stress tests, ECB meeting increase caution
* Share gains, recent data boost economic recovery hope
(Updates prices, adds detail)
By Steven C. Johnson
NEW YORK, May 5 (Reuters) - The dollar rebounded from a
one-month low against the euro on Tuesday as investors took
profits ahead of a European Central Bank meeting and as worries
about U.S. banks dimmed some recent optimism about recovery.
Hopes that the world has already endured the worst of the
recession have boosted stock markets in recent weeks and dried
up safe-haven flows into the dollar <.DXY>, which lost nearly 4
percent against a basket of currencies in March and April.
But investors began selling the euro after it hit a monthly
high near $1.3440 amid uncertainty about Thursday's ECB meeting
and results of stress tests on U.S. banks. A source told
Reuters some 10 banks would be told to raise more capital.
[]
"When you hear that 10 banks may need more capital, that's
cause for concern, and that could put a wrench in the recent
rally we've seen on Wall Street," said Matt Esteve, currency
strategist at Tempus Consulting in Washington. "Everything is
in limbo until we get past these two events."
The euro was last down 0.3 percent at $1.3369 <EUR=> after
earlier hitting a one-month high at $1.3439, according to EBS.
It fell 0.4 percent to 132.12 yen <EURJPY=>, while the dollar
fell 0.1 percent to 98.82 yen <JPY=>.
Sterling was up 0.4 percent at $1.5095 <GBP=> after earlier
hitting a four-month peak at $1.5161. The Australian dollar
rose 0.2 percent to $0.7415 <AUD=> ahead of a meeting of the
Reserve Bank of Australia, which markets expect will result in
a decision to hold rates at 3 percent. []. The New
Zealand dollar added 0.9 percent to $0.5803 <NZD=>.
The moves stalled a sustained rally in stock markets and
high-yield currencies driven by hopes that the worst of the
world recession was over. Recent data showing improved
manufacturing in Europe, China and India boosted that view.
Federal Reserve Chairman Ben Bernanke said Tuesday the U.S.
economy was on track for a recovery but said the rebound would
be slow and the jobless rate would still rise. []
But while there are risks, "there are legitimate grounds
for optimism too, as things are not getting as bad as quickly
in China and other economies," said Shaun Osborne, senior
currency strategist at TD Securities in Toronto.
Some in the market said they were wary of taking on too
much risk ahead of Thursday's policy announcements by the
European Central Bank and the Bank of England.
The ECB is expected to cut its main interest rate to a
record low 1 percent, while the BoE is seen holding rates at
0.5 percent, also a record low.
More importantly, markets want to see if the ECB suggests
it will keep cutting rates or adopt "non-conventional" policy
measures such as buying securities to stimulate growth.
Osborne, however, said the euro could resume its rally,
possibly to $1.35 and beyond, if the ECB opts not to adopt
non-standard policy.
"If there's reluctance to go down that road, it provides a
window for the euro to rally," he said.
(Editing by Dan Grebler)
