The euro hit a seven-week high against the yen on Monday as a rise in shares prompted dealers to unwind long yen positions, but scepticism about the credibility of the euro zone's bank stress tests limited its gains versus the dollar.

Traders said interbank players who had bet the euro would fall below the key 110 yen level, or an 8 1/2-year low of 107.30 yen reached in late June, were forced to dump their short positions as upbeat U.S. corporate earnings improved investor risk appetite, boosting riskier assets.

Better risk tolerance also lifted higher-yielding currencies, with the Australian dollar striking a fresh 10-week high of $0.8982 AUD=D4. The Aussie now has resistance at $0.9000, with support seen at $0.8895 ahead of $0.8860.

In addition to higher stocks, charts suggest the euro is on an upward trend as the currency has managed to rebound sharply after hitting a recent low at 110.02 yen last week, said Mitsuru Sahara, chief manager of FX derivatives trading at Bank of Tokyo-Mitsubishi UFJ.

It looks as if the euro will try 115 yen before falling towards 110 yen again.

The euro rose 0.3 percent to 113.10 yen EURJPY=R after climbing as far as 113.49 yen EURJPY=R on trading platform EBS, its highest since early June. It jumped nearly 0.8 percent on Friday.

It kept in a tight range against the dollar in Asian trade as players awaited Europe's reaction to the stress test results.

Just seven of 91 banks failed the tests, including some in Greece and Spain, for an overall capital shortfall of 3.5 billion euros.

Some considered the conditions too lenient, leading to low capital requirements and fuelling doubts about the exercise.

On the surface, if anything, you have to take these tests with a pinch of salt, said Jonathan Cavenagh, currency strategist at Westpac, Sydney.

Sovereign debt problems remain, funding constraints for their banks are still there and these have the potential to weigh on the euro.

The euro inched up 0.1 percent on the day to $1.2916 EUR=. Near term support is seen around $1.2870, its 100-day moving average.

Speculators have been cutting net short positions in the euro, with the Commodity Futures Trading Commission data showing net shorts at 24,251 contracts in the week to July 20 compared with 27,050 in the prior week. [IMM/FX].

Fears of a euro zone debt crisis and its impact on European banks had driven the euro below $1.19 last month, its lowest since 2006. But it began a swift recovery in July and hit a 10-week high above $1.30 earlier last week.

That was partly driven by data showing the euro zone economy has been holding up better than anticipated, even as governments tighten their belts to rein in large deficits.

On the other hand, recent U.S. housing and manufacturing data has suggested a recovery there may be fizzling.

Economists have steadily marked down forecasts for Friday's U.S. gross domestic product report. More signs of a slowdown in the manufacturing sector and consumer spending in the United Sates this week could push down yields and prompt investors to increase short positions on the greenback, traders said.

The dollar index .DXY was steady at 82.50. The dollar inched up 0.1 percent against the yen to 87.55 yen JPY=.

The low-yielding yen, which often takes a beating when stocks gain, was broadly under pressure.

Tokyo's Nikkei stock average .N225 gained 0.8 percent after the Standard & Poor's 500 Index .SPX rose above 1,100 on Friday as General Electric (GE.N) raised its dividend and Honeywell (HON.N) posted better-than expected results. [.T] [.N] (Additional reporting by Anirban Nag in Sydney; Editing by Joseph Radford and Charlotte Cooper)