The euro edged up against the dollar on Monday but came off early highs as investors concluded that although European bank stress tests revealed no horrors they delivered no compelling reason to buy the single currency.

Relief that just seven of 91 banks failed the tests, including six in Spain and Greece, for an overall capital shortfall of 3.5 billion euros was marred by concerns that the tests were not stringent enough.

An initial appetite for risk faded, with European shares down 0.3 percent .FTEU3 and U.S. stock futures lower.

The stress tests failed to inspire much of a euro/dollar rally, but at the same time there is no reason for bears to start selling the euro aggressively either, said Roberto Mialich, currency strategist at Unicredit in Milan.

By 7:20 a.m. ET, the euro was 0.2 percent higher against the dollar at $1.2923 but off a session high of $1.2958.

Technical analysts said the euro may push toward $1.3125, the 38.2 percent retracement of the December to June move.

To do that, however, it would need to sustain a move above $1.30, a level it has not retested since hitting a 10-week high around $1.3028 early last week.

The euro's downside was also seen limited while it remained above support at $1.2870 -- its 100-day moving average -- and last week's low around $1.2730, leaving it hemmed in within a range for the time being.

Any downside lurch has been prevented by the generally reassuring conclusions of the tests ... no surprises as to the vulnerabilities, and no real headache in terms of the required capitalization to bolster their position, said Daragh Maher, deputy head of FX strategy at Credit Agricole CIB.

At the same time, any relief rally for the euro has been curtailed by inevitable criticism about some of the deficiencies of the stress test assumptions.

Some said the euro's gains could be constrained by this week's redemption of maturing euro zone bonds and coupon payments worth some 45 billion euros, according to Citi estimates.

Data from the Commodity Futures Trading Commission showed currency speculators cut net short positions in the euro. Net shorts fell to 24,251 contracts in the week to July 20 compared with 27,050 in the prior week. .

YEN GAINS

The yen gained broadly as investors stepped back from risk-taking.

The euro hit a seven-week high of 113.49 yen as dealers unwound long yen positions, but then ran into offers from Japanese exporters around 113.30/50 yen.

It was last down 0.4 percent at 112.49 yen, helping to pull the dollar down 0.5 percent to 87.00 yen.

The dollar was expected to remain under pressure after recent weak U.S. housing and manufacturing data. Economists have steadily marked down forecasts for Friday's U.S. second quarter gross domestic product numbers.

The Australian dollar came off a fresh 10-week high of $0.8990, hit on interest rate differentials with the United States, while sterling failed to hold a three-month high of $1.5504 following strong economic data last week.

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