* Euro reverses gains after hitting $1.3029
* Bank stress tests, auction jitters weigh on euro
* Yen down on intervention risk
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By Naomi Tajitsu
LONDON, July 20 (Reuters) - The euro fell on Tuesday,
reversing a climb to its highest against the dollar in more than
two month, as European shares fell and investors reckoned its
gains have been overdone before bank stress test results.
The euro retreated from $1.3029 hit on trading platform EBS
as some investors questioned whether the single currency would
sustain gains above $1.30 given that stress test results due on
Friday may show weakness in euro zone financial institutions.
Poor demand at a Hungarian Treasury bill offer also stung
the euro as it weighed on risk sentiment. In turn, the dollar
was boosted across the board, recovering from Monday's fall
against a currency basket on weak U.S. economic data.
"We've seen risk appetite claw back a fair amount, and the
market is questioning whether that move is valid," said Jane
Foley, director of research at Forex.com.
"There is a lot of better news priced into the euro, and
ahead of the stress tests, it's probably gone a little too far.
The market is taking some risk off the table."
By 1108 GMT, the euro <EUR=> traded 0.3 percent lower on the
day at a session trough of $1.2903 as European shares <>
fell 0.5 percent. Traders saw support for the euro around the
previous day's low of $1.2870.
Some in the market said the euro's losses accelerated after
Hungary sold a smaller amount of three-month Treasury bills than
originally planned. []
This contrasted with auctions by Spain and Greece, which
sold short-dated paper without incident, while Ireland managed
to sell six- and 10-year debt -- albeit at higher yields -- a
day after Moody's downgraded its sovereign rating.
[]
YEN NEAR 7-MTH HIGH VS DOLLAR
The dollar rose 0.1 percent to 86.83 yen <JPY=>, but stayed
near a seven-month low of 86.27 hit on EBS on Friday. Yen
strength has prompted market investors to consider how Japanese
authorities may deal with a firmer currency.
Traders suspect they may not want to see the 85 yen level
breached in a hurry, though many doubt Tokyo is ready to
intervene at this point.
The dollar was down 0.1 percent against the Canadian dollar
at C$1.0533. Markets expect the Bank of Canada to raise interest
rates by 25 basis points on Tuesday. []
The euro's winning streak paused after the single currency
had capitalised on a run of weak U.S. data, the latest of which
was a slide in July home builder confidence released on Monday.
Some in the market say results of European Union bank stress
tests due out on Friday are expected to soothe market concerns
about the region's banking system, but others speculate some
banks will not pass the test.
Nationalised German lender Hypo Real Estate is expected to
fail the test, a source familiar with the matter said on Monday.
[]
Some analysts said that even if some banks failed the test,
overall, the results would be positive for the euro on the view
that signs of weakness would demonstrate the test's validity.
"That would mean the test scenarios are working. If all of
the banks passed, the market would say the tests were
unrealistic," said Lutz Karpowitz, currency strategist at
Commerzbank in Frankfurt.
But some analysts say the euro could be in for a "buy on the
rumour sell on the fact" retreat after the stress test results,
having risen nearly 10 percent from a four-year low against the
dollar since June 7.
The market also awaited U.S. housing starts data for June
after data on Monday showed the NAHB/Wells Fargo Housing Market
index fell more than expected in July to its lowest level since
April 2009. []
(Additional reporting by Tamawa Desai, editing by Nigel
Stephenson)
