The euro rose on Friday after a survey showed German business sentiment posted a record jump in July to its highest level in three years, and corporate results lifted stocks ahead of European bank stress tests results.

The single currency was lower before the Ifo survey, as Spanish newspaper El Pais reported that several of the country's 18 savings banks had failed the tests, which are due for publication on Friday afternoon.

The report from Munich-based Ifo think tank helped ease concerns the global economy could slip back into recession.

We expected an increase but we didn't expect this. The German economy is running really strong at the moment, said Ralph Solveen at Commerzbank.

The companies are not letting themselves be distracted by all the negative discussions going on, such as the bank stress tests, the debt crisis or the threat of a double-dip recession in the United States.

The euro gained 0.4 percent to $1.2945 and was up 0.4 percent at 112.52 yen. The dollar, meanwhile, slipped 0.4 percent against a basket of major currencies <.DXY>.

The tests on 91 European banks, which use scenarios including declines in the value of sovereign debt they hold, are due at 1600 GMT (12 noon EDT).

Meanwhile, Manfred Weber, the head of the Association of German Banks, told local radio that he was confident that German banks all in all would perform well at the tests.

The market's assumption is that several of the Spanish Cajas will fail, along with some peripheral European banks. But if it goes beyond that the euro reaction will be negative, said Adam Cole, head of global fx strategy at RBC Capital Markets.

Some analysts also consider Germany's quasi-public regional landesbanks to be at risk.

According to a survey of investors conducted by Goldman Sachs, 10 out of the 91 banks subjected to the tests were expected to fail.

The Goldman poll of 376 respondents, including hedge funds and long-only investors, showed European banks were on average expected to raise 37.6 billion euros ($48.4 billion) in extra capital following the tests, it said in a note dated July 22.

The Ifo announcement also boosted stocks and commodity prices, with crude drifting 0.1 percent higher to trade slightly below $80 a barrel and copper rising 0.9 percent.

IFO, EARNINGS HELP

World stocks measured by MSCI All-Country World Index <.MIWD00000PUS> advanced 0.6 percent, boosted by a 2.3 percent rise in Tokyo's Nikkei average <.N225> following robust quarterly U.S. corporate results.

Microsoft Corp easily beat Wall Street forecasts with a 48 percent rise in quarterly profit.

Europe's FTSEurofirst 300 <.FTEU3> rose 0.4 percent, while European banks <.SX7P> were flat.

Bund futures fell 8 ticks to 128.61 and yields on 10-year benchmark German Bunds were up 1 basis point at 2.674 percent.

It is priced into the market to a large extent that we will see some banks in Spain fail the stress test. If no Spanish banks fail, the market will say these tests are worthless, said Niels From, chief analyst at Nordea in Copenhagen.

For now, it's really a wait-and-see game and the only problem is we have to wait till tonight, unless they publish the results earlier than expected.

(Additional reporting by Neal Armstrong and Ian Chua in London; editing by John Stonestreet)

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