FOREX-Euro/dlr hits 1-mth high, boosted by risk demand

* 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 further 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.

"Markets are fearful of missing the next big thing, which is the big recovery trade, and so they're pursuing that for the time being," said Chris Turner, head of currency strategy at ING in London.

European shares .FTEU3 1.2 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.

Results of a stress test for U.S. banks expected on Thursday may show that financial institutions may need significantly more capital to deal with ongoing weakness in the global banking system.

A source told Reuters about 10 banks out of the 19 tested would be told they needed to increase their capital cushions. [ID:nN04395186]

Markets on Tuesday downplayed the negative risk of such a prospect, and ING's Turner pointed out that in a different environment, the possibility that many banks are still in need of funding may be considered a negative risk for the market.

But with markets tilted in favour of risk, many some in the market took on a more optimistic view of the possible outcome of the tests, reckoning that markets should be relieved that more banks were not in need of capital, which was helping to boost risk demand.

Still, some in the market said the risk rally may sputter if the stress tests results offer any negative surprises.

Markets awaited a reading of the U.S. non-manufacturing sector in April, due at 1400 GMT, along with comments from Federal Reserve Chairman Ben Bernanke, who testifies on the U.S. economy before the Joint Economic Committee later in the day.

On Monday, Richmond Fed President Jeffrey Lacker said that the U.S. recession is fading and growth will resume this year, while the central bank must not wait too long before raising interest rates from a near-zero levels at the moment [ID:nN04412008]

Sterling GBP=D4 rose 0.6 percent to $1.5130, its highest level since early January, after UK market participants returned from a holiday on Monday.

The dollar index .DXY was little changed around 83.775, hovering close to 83.600 hit against a basket of currencies on Monday, the first time since late March.

The dollar inched up to 99.20 yen JPY=. The yen was on the back foot against other currencies, relinquishing early gains against the euro EURJPY=R. The pair traded at 132.50 yen, slightly lower 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 tentative 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 $0.7465 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].

Some in the market were wary of taking on too much more 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. (Editing by Victoria Main)