The euro rose against the dollar on Monday after a fall in U.S. home-builder sentiment to its lowest level in more than a year added to worries about the U.S. economy.

The euro traded near its recent two-month high against the dollar, rebounding from early lows hit after a downgrade of Ireland's sovereign ratings and the suspension of talks between Hungary and international lenders.

Demand for the dollar fell after the NAHB/Wells Fargo Housing Market index fell more than expected in July to its lowest level since April 2009 after a popular home-buyer tax credit expired in April.

The dollar has been under pressure in recent weeks as disappointing U.S. economic news quashed expectations of an interest-rate hike by the Federal Reserve.

The euro is now simply trading on U.S. economic weakness, said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey. We have had two or three weeks of increasingly poor U.S. statistics and that's really the issue now.

The housing market, which played a large role in the U.S. economy's fall into recession, is considered key to recovery.

In midday New York trading, the euro was up 0.2 percent versus the dollar EUR= at $1.2956, steadying off a session low of $1.2872, according to Reuters data.

Kathy Lien, director of currency research at GFT Forex in New York, said the break last week above the 100-day simple moving average in the euro/dollar around $1.29 added to support for the euro.

Traders said a large buy order from the Middle East, executed through a major U.S. bank in London had lifted euro/dollar to a session high of $1.2991.

Technical analysts saw near-term support at around $1.2850, the 50 percent retracement of the euro's fall from a high near $1.3820 in March to a four-year low around $1.1876 in early June.

STRESS TESTS

Investors also awaited the results of stress tests on 91 European banks due on Friday.

Bankers and officials in Greece, Spain and Belgium joined a chorus of countries expecting their banks to pass European stress tests, but doubts linger over whether the health checks are tough or transparent enough.

We expect the stress test to be well received, but its main effect on the euro will be to reduce the probability of a large downside move, said Raghav Subbarao, currency strategist at Barclays Capital.

Some analysts said a recent rebound in the euro, which hit a two-month high of $1.3008 on electronic trading platform EBS on Friday, may have been overdone.

The euro's recent strength has been exaggerated by positions, as people scale back from extremely short positions, Subbarao said.

The latest data from the Commodity Futures Trading Commission showed speculators have been increasing long positions in the yen and cutting longs in the dollar, especially against the euro and pound.

Against the yen, the euro was up 0.4 percent EURJPY=R at 112.36. Traders said the cross yen pair was attempting to climb back into its daily Ichimoku cloud for the third straight day, but was so far capped by Japanese offers placed ahead of the cloud base at 113.14 yen.

It has not managed to close within the cloud since early May. The cloud top is some way off, coming in at 117.97 yen.

The dollar was up 0.1 percent versus the yen at 86.71 yen JPY=, bouncing back from a seven-month low of 86.27 yen hit on Friday on EBS. (Additional reporting by Tamawa Desai in London; Editing by Leslie Adler)

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