Dollar edges lower ahead of ECB, stress tests

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NEW YORK (Reuters) -- The dollar fell against the euro and the yen Wednesday as uncertainty over several key events later in the week boosted safe-haven flows into the Japanese currency.

The euro came under earlier pressure ahead of the European Central Bank's policy meeting on Thursday when the central bank is expected to cut interest rates and may announce measures to stimulate lending and growth.

But investor nervousness over the results of stress tests on U.S. banks, due on Thursday, and the release of a key jobs market report on Friday kept risk appetite subdued and confined major currencies to ranges.

"A lot of bouncing around," said Andrew Busch, global FX strategist at BMO Capital Markets in Chicago. "There's some nervousness over the actual release of the stress test tomorrow and of course going into Friday we have the nonfarm payrolls number."

A source familiar with the results said results on Thursday will show Bank of America (BAC, Fortune 500) has a $34 billion capital shortfall.

In early afternoon trading in New York, the euro was changing hands at $1.3337, up 0.1%, after having earlier climbed as high as $1.3374 after ADP Employer Services data showed the United States cut fewer-than-expected private jobs in April.

The euro has risen sharply in recent sessions, hitting a one-month high near $1.3440 earlier this week, after a slew of economic reports from around the globe stoked hopes that the world economy may be through the worst of the recession, helping to dry up safe-haven flows into the U.S. dollar.

But that optimism was tempered by caution on Wednesday. The ECB is expected to cut interest rates to a record low 1% on Thursday, though traders were more interested in whether it announces other so-called unconventional measures, such as buying securities.

Against the Japanese yen, the dollar last traded down 0.4 % at 98.45 yen. The yen traded weaker against the euro, changing hands at 131.10 yen compared with 130.77 in earlier trade.

Standard & Poor's decision to cut the credit ratings on five German banks also weighed on the euro, traders said.

Considering the risks ahead, "I would still favor selling rallies in the euro," said Jacob Oubina, currency strategist at Forex.com in Bedminster, N.J.

Losses for the euro were limited, however, because the market in general remains more favorably disposed toward risk, Oubina added.

The U.S. jobs data, coupled with recent encouraging signs from the housing market and improved manufacturing data from Europe, China and India, have all added to hopes that the worst may be over.

Dan Cook, senior market analyst at IG Markets in Chicago, said the jobs data was especially hopeful. "With everything dependent on the labor market, this was a fantastic indication that maybe we are seeing a turnaround."

The Bank of England also meets on Thursday and is seen holding its benchmark interest rate at 0.5%, a record low.

The pound was up 0.1% at $1.5083.