The euro eased a bit after hitting a two-month high against the dollar on Tuesday, but remained supported as weak U.S. economic data hurt the greenback.

The euro rose as high as $1.3029 on trading platform EBS, with dealers saying key stop-losses -- closing of positions to cap loss-making trades -- had been taken out around $1.3010, with more above $1.3030. By 0929 GMT (5:29 a.m. EDT), it was up 0.1 percent on the day at $1.2955.

Support for the euro is seen around the previous day's low of $1.2870. Resistance is seen around $1.3113, a Fibonacci retracement of its decline from last December to early June.

Sentiment toward the euro is quite positive, said Lutz Karpowitz, senior currency strategist at Commerzbank in Frankfurt.

The short-term sovereign debt problems seem to be under control, and data out of the U.S. is weighing on the dollar.

Traders said that options at a strike price of $1.2950 and $1.3000 set to expire later in the day may limit the upside.

Risk sentiment grew after Chinese shares rose 2 percent but European shares reversed course and were down 0.6 percent .FTEU3 by midday trade.

Results of European Union bank stress tests due out on Friday are expected to soothe market concerns about the region's banking system, even though some banks are not expected to pass the test.

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

That would mean the test scenarios are working. If all of the banks passed, the market would say the tests were unrealistic, Commerzbank's Karpowitz said.

The euro has also shrugged off potentially damaging news such as Ireland's debt downgrade by Moody's ratings agency on Monday and a breakdown in talks between Hungary and international lenders at the weekend.

But some analysts say the euro could be in for a buy on the rumor sell on fact retreat after the stress test results, having risen nearly 10 percent from a four-year low.

While we would expect the euro to extend gains toward the $1.3115 area over the next couple of days ... the euro is likely to struggle from here given the recent strong gains over the course of the past month, BNP analysts said in a note.


The yen remained near a seven-month high against the dollar, prompting market players to look to what authorities in Japan could do about a firmer yen.

The dollar was up 0.1 percent on the day at 86.83 yen, but not far from a low of 86.27 hit on trading platform EBS on Friday.

Traders suspect Japanese officials would not want to see the 85 level breached in a hurry, though many traders doubt Tokyo is ready to intervene at this point.

I guess the authorities will be nervous. There will be verbal intervention or they might do rate checks as they did before. But I don't think they can do actual intervention, said a trader at a Japanese financial institution.

The dollar was down 0.3 percent against the Canadian dollar at C$1.0514. Markets expect the Bank of Canada to raise interest rates by 25 basis points on Tuesday.

The market was also awaiting the release of 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.

The Australian dollar rose 1.1 percent to $0.8778.

It recovered on rising Chinese shares after losing ground as minutes from the Reserve Bank of Australia's July policy meeting suggested it was unlikely to raise interest rates next month if coming inflation data moderated as expected.

(Additional reporting by Hideyuki Sano in Tokyo; Editing by Susan Fenton)