The euro hit an 11-week high against the dollar and a seven-week high against the yen on Tuesday as solid bank earnings lifted equities and encouraged investors to take on more risk.

Strong earnings from Swiss bank UBS (UBSN.VX) helped lift European shares .FTEU3, with banking stocks .SX7P leading the gains and supporting the market's relief over the results of last week's European bank stress tests.

This was another reason to sell the dollar for the euro and higher-yielding currencies as recent weak U.S. economic data, contrasting with better data from Europe and Asia, pushed the U.S. currency to a 12-week low versus a basket of currencies.

European equities today are up ... helping keep a bid tone in the euro and urging U.S. equity futures to a positive open on the day, said Sacha Tihanyi, a currency strategist at Scotia Capital in Toronto.

The fundamental outlook seems to be deteriorating in the U.S., while the state of affairs in the euro zone seems to be looking up relative to very depressed expectations that had persisted for much of 2010, he added.

In morning trading in New York, the euro had climbed around 0.2 percent on the day to $1.3036 EUR=, according to Reuters data, its highest since early May.

The next target for the euro, which has risen close to 10 percent since it fell below $1.20 last month, will be $1.3125, the 38.2 percent retracement of its November-June fall, technical analysts said.

We are seeing more and more banks alter their forecasts higher in euro/dollar either from research or from technical teams, said Brad Bechtel, a managing director for trading at Faros Trading LLC in Stamford, Connecticut, adding:

The 38.2 percent Fibonacci line comes in around 1.3125 on the charts and is going to be the first line of resistance.

Investor focus will now shift to U.S. consumer confidence figures to be released at 10 a.m. (1400 GMT).

ING currency strategist Tom Levinson said that if the consumer confidence data were weak it could provide a catalyst for a move higher in the euro. ECONUS

Declines in the euro were also seen limited while it remained above support at $1.2870 -- close to its 100-day moving average -- and last week's low around $1.2730.

The recent run of better euro zone data continued on Tuesday, with above-forecast euro zone money supply and German consumer confidence figures.

Against a basket of currencies .DXY, the dollar hit a 12-week low of 81.904.

Stronger appetite for risk also weighed on the low-yielding Japanese yen, with the euro rising to a seven-week high around 113.96 yen EURJPY=R.

RISK CURRENCIES RISE

Underscoring a brighter global outlook, India hiked interest rates on Tuesday, citing inflationary pressures and a firm economic recovery, while the Reserve Bank of New Zealand is expected to raise rates this week.

Among perceived higher-risk currencies, the New Zealand dollar NZD=D4 hit a six-month high against the U.S. dollar, the Australian dollar AUD=D4 rose to an 11-week high while sterling GBP=D4 hit its strongest level in five months.

The market has drifted away from fears of a double dip, and the rate tightening environment -- with a rate hike in India and one expected in New Zealand -- is attracting flows into higher yielding and emerging market assets and out of the dollar, said Peter Frank, currency strategist at Societe Generale. (Additional reporting by Jessica Mortimer in London; Editing by James Dalgleish)

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