Asian stocks rose to fresh seven-month highs on Tuesday as optimistic comments from central bankers bolstered confidence that the worst of the global economic downturn may have passed, offsetting anxiety about U.S. banks and their capital needs.

European shares looked poised to follow the Asian advance and play catch up with Monday's big U.S. rally, which took the benchmark Standard & Poor's 500 index <.SPX> into positive territory for the year <.N>.

The S&P is now up 34 percent from a 12-year low hit just two months ago, but even that performance has lagged the monster rally underway in the Pacific.

The MSCI index of Asia Pacific stocks outside Japan <.MIAPJ0000PUS> was 0.5 percent on the day and is now up more than 45 percent from its March low.

Still, the day's equity gains in Asia were muted by news the U.S. Treasury will instruct about 10 banks to raise more capital to shore up their balance sheets in case the economic deteriorates further. The government will release more details of bank stress tests on Thursday.

Hong Kong's Hang Seng index <.HSI> rose 0.13 percent, led by a 0.8 percent gain in global lender HSBC <0005.HK>, while Australia <.AXJO> edged up 0.2 percent.

Taiwan's main TAIEX index was up 0.8 percent <.TWII>, benefiting from closer investment ties between China and the island economy. Japanese and South Korean markets were closed for holidays.

LIGHT AT THE END OF THE TUNNEL

The Australian dollar rose to its highest since early October against the U.S. dollar after the Reserve Bank of Australia kept its key cash rate steady, while the greenback firmed against the euro and sterling as traders took profits on those currencies amid caution ahead of the U.S. bank stress test results.

In its statement, the Australian central bank noted improving conditions in China, a key driver of regional growth.

The Reserve Bank's definitely viewing the economic prospects moving ahead with more a glass half-full than glass half-empty, they mention that the Chinese economy is picking up speed and that commodity prices have firmed, said Josh Wiliamson, economist with Citi in Australia.

The RBA's statement dovetailed with similarly optimistic comments from U.S. and Swiss policy makers.

The president of the Federal Reserve Bank of Richmond, Jeffrey Lacker, said the U.S. recession is fading and growth will resume this year. And the vice chairman of the Swiss National Bank, Philipp Hildebrand, told a German newspaper the downturn may be nearing a turning point.

U.S. stock futures were down 0.3 percent after a source familiar with a series of stress tests on 19 U.S. banks told Reuters that about 10 lack an adequate cushion of capital needed to guard against further economic decline.

Investors will likely remain skittish until the stress test results are announced, but improving U.S. and emerging market economic data, particularly in Asia, have encouraged investors to take risks.

Ivan Leung, chief investment strategist with JPMorgan Private Bank Asia in Hong Kong, said he did not see the stress tests as a major obstacle to this trend.

China's speedy recovery compared with other major economies remains the top draw for foreign investors, who have poured cash into the region since March.

The Intercontinental Exchange's U.S. dollar index <.DXY>, which measures its value against a basket of six other major currencies, was up 0.27 percent, after touching the lowest since March 26 on Monday. The gain was largely against the euro, which had hit a one-month high against the dollar on Monday.

Against the yen, which has often gained in times of market uncertainty, the dollar fell 0.1 percent to 98.80 yen.

The Australian dollar was up fractionally at $0.7406. The Australian dollar has risen in tandem with global equity markets, up some 14 percent in the last two months.

Bonds were steady, though fixed-income markets were quiet with financial markets in Japan and Korea closed.

U.S. crude for June delivery was down 0.8 percent to $54.08 a barrel after settling at the highest since November 24 on Monday.

Oil has been gaining steadily since mid-February on expectations economic recovery is in sight for the world's biggest energy consumers.

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