* Euro comes off earlier highs vs dollar as caution sets in
* Yen rises as risk-taking fades; European shares turn lower
* Market relief at stress test results offset by scepticism
(Adds quotes, updates prices)
By Jessica Mortimer
LONDON, July 26 (Reuters) - The euro edged up against the
dollar on Monday but came off early highs as investors concluded
that although European bank stress tests revealed no horrors
they delivered no compelling reason to buy the single currency.
Relief that just seven of 91 banks failed the tests,
including six in Spain and Greece, for an overall capital
shortfall of 3.5 billion euros was marred by concerns that the
tests were not stringent enough. []
An initial appetite for risk faded, with European shares
down 0.3 percent <> and U.S. stock futures lower.
"The stress tests failed to inspire much of a euro/dollar
rally, but at the same time there is no reason for bears to
start selling the euro aggressively either," said Roberto
Mialich, currency strategist at Unicredit in Milan.
By 1120 GMT, the euro was 0.2 percent higher against the
dollar at $1.2923 <EUR=> but off a session high of $1.2958.
Technical analysts said the euro may push towards $1.3125,
the 38.2 percent retracement of the December to June move.
To do that, however, it would need to sustain a move above
$1.30, a level it has not retested since hitting a 10-week high
around $1.3028 early last week.
The euro's downside was also seen limited while it remained
above support at $1.2870 -- its 100-day moving average -- and
last week's low around $1.2730, leaving it hemmed in within a
range for the time being.
"Any downside lurch has been prevented by the generally
reassuring conclusions of the tests ... no surprises as to the
vulnerabilities, and no real headache in terms of the required
capitalisation to bolster their position," said Daragh Maher,
deputy head of FX strategy at Credit Agricole CIB.
"At the same time, any relief rally for the euro has been
curtailed by inevitable criticism about some of the deficiencies
of the stress test assumptions."
Some said the euro's gains could be constrained by this
week's redemption of maturing euro zone bonds and coupon
payments worth some 45 billion euros, according to Citi
estimates. []
Data from the Commodity Futures Trading Commission showed
currency speculators cut net short positions in the euro. Net
shorts fell to 24,251 contracts in the week to July 20 compared
with 27,050 in the prior week. [].
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For a graphic of dollar positioning, click
http://graphics.thomsonreuters.com/10/CFTC_CURR.html
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YEN GAINS
The yen gained broadly as investors stepped back from
risk-taking.
The euro hit a seven-week high of 113.49 yen <EURJPY=R> as
dealers unwound long yen positions, but then ran into offers
from Japanese exporters around 113.30/50 yen.
It was last down 0.4 percent at 112.49 yen, helping to pull
the dollar down 0.5 percent to 87.00 yen <JPY=>.
The dollar was expected to remain under pressure after
recent weak U.S. housing and manufacturing data. Economists have
steadily marked down forecasts for Friday's U.S. second quarter
gross domestic product numbers. [] <ECONUS>
The Australian dollar came off a fresh 10-week high of
$0.8990 <AUD=D4>, hit on interest rate differentials with the
United States, while sterling failed to hold a three-month high
of $1.5504 <GBP=D4> following strong economic data last week.
