The euro fell from a more than two-month high against the U.S. dollar on Tuesday as tumbling equity prices hit appetite for risk, prompting investors to book profits ahead of the results from stress tests on European banks.

The euro retreated from $1.3029 hit on electronic trading platform EBS as investors questioned whether the currency would sustain gains above $1.30 given that test results due on Friday may show weakness in some euro zone banks.

U.S. stocks came under pressure after quarterly earnings reports from Goldman Sachs Group Inc (GS.N) and others disappointed investors.

We've just seen a decent round of profit-taking. There is concern about the stress tests results, said John McCarthy, director of foreign exchange trading at ING Capital Markets in New York. We've touched a high of almost $1.3030. People said that's enough for the euro for the time being.

In early New York trading, the euro EUR= traded 0.6 percent lower at $1.2863. Against the yen, the euro was down 0.3 percent at 111.86 EURJPY=R.

The dollar rose 0.3 percent to 86.96 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.

Market participants will be keen to see if the dollar falls to a 15-year low by breaching the November 2009 trough of 84.81, according to Reuters data.

The dollar rose 0.2 percent against the Canadian currency at C$1.0566 CAD=.

The Bank of Canada raised interest rates for the second time in two months, but cautioned that the domestic and global recoveries will be slower than previously expected.


Declines in the euro accelerated after Hungary sold a smaller amount of three-month Treasury bills than originally planned.

This contrasted with smoother debt auctions elsewhere. Ireland sold 1.5 billion euros in bonds on Tuesday, weathering a ratings cut by Moody's, while Spain and Greece found buyers for shorter-term paper in further signs of recovering demand for peripheral euro zone debt.

The euro had rallied more than 5 percent so far this month on easing concern about the euro zone debt crisis and after weak U.S. economic news eroded the dollar's yield appeal.

I wouldn't be surprised to see buying interest down below $1.28, said ING's McCarthy. U.S. yields continue to sink and that's undermined the dollar's support a bit.

U.S. housing starts hit their lowest level in eight months in June, data showed on Tuesday, further evidence the economy lost momentum, but a rise in permits offered hope that homebuilding was poised to pick up.

Some in the market say results of the European Union bank stress tests could soothe market concerns about the region's banking system, though some banks may not pass the test.

Nationalized German lender Hypo Real Estate is expected to fail the test, a source familiar with the matter said on Monday.

Analysts said that even if some banks failed the test, the results would be overall 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. (Additional reporting by Naomi Tajitsu; Editing by Padraic Cassidy)