The Australian dollar rallied on Tuesday after an upbeat assessment of the global economy by the Reserve Bank of Australia spurred appetite for high-yielding currencies, while rising risk demand also helped boost the euro.

This put the dollar under broad selling pressure, pushing it to a three-month trough versus the Swiss franc. The franc later fell after weak Swiss consumer price data tempered the view that deflation risks had faded.

The RBA held its key interest rate at 4.5 percent on Tuesday, saying policy was appropriate given caution in global markets even as it remained optimistic about the outlook for Asia and the domestic economy.

While the RBA had been widely expected to keep rates on hold, some investors had braced for a dovish statement after recent signs that the Chinese economy may be slowing.

Analysts said relief over the RBA position calmed investors and boosted global risk appetite, prompting an unwinding of extreme short positions in currencies such as the euro.

Risk appetite staged a strong turnaround, said Boris Schlossberg, a director for currency research at GFT Forex in New York. Although Australian monetary officials acknowledged the fact that global growth was slowing, they nevertheless remained positive regarding economic activity in Asia Pacific.

By morning trading in New York, the Australian dollar AUD=D4 had climbed more than 1 percent to $0.8527, pulling away from a session low of $0.8318.

The euro EUR= rose 0.4 percent to $1.2587, poking through option barriers at $1.26. The euro also briefly hit a two-week high against sterling, rising to as much as 83.11 pence earlier.

The euro has struggled to make major gains above $1.2600, however, with traders citing stop-loss orders above $1.2610. The formation of an Ichimoku cloud technical pattern around $1.2576 has also constrained the single currency.

Ian Stannard, senior foreign exchange strategist at BNP Paribas, said there was potential for the euro to gain broadly and move toward a new target of 84 against sterling as he expected a European Central Bank statement on Thursday to comfort markets.

He also said positive results from stress tests of euro zone banks due later this month would boost euro.

In the United States, markets awaited the ISM report on the country's service sector in June.

Although risk appetite has been positive in overnight trade, if the ISM data misses its mark the flows could quickly reverse as fresh fears emerge that the U.S. economy will face a significant slowdown in the second half, said Schlossberg.

SWISS FRANC RISES

The Swiss franc CHF= rose to 1.0563 per dollar according to Reuters data, its strongest since mid-April, only to pull back to around 1.0625.

It was hit by data showing Swiss CPI rose 0.5 percent in June from a year ago, below the 1 percent rise analysts had forecast. The franc EURCHF= was flat against the euro at 1.3365 per euro, down from the day's high of 1.3282.

In June, the Swiss National Bank backed off a pledge to fight franc appreciation, saying deflation risks had faded.

Tuesday's improvement in risk appetite followed weeks in which it took a beating on growing worries about the health of the euro zone's banking system, a slowdown in China and risks of a double-dip recession in the United States.

Clearly, people are feeling a little better about the world, but I am a pessimist, said Simon Derrick, head of currency research at Bank of New York Mellon. China could see a sharp slowdown toward the end of the year, which makes me think the bullish story is not as positive as it might look.

(Additional reporting by Naomi Tajitsu in London; Editing by Andrea Ricci)

BNP Paribas