The dollar rebounded from a one-month low against the euro on Tuesday as investors took profits ahead of a European Central Bank meeting and on worries about the U.S. banking sector. Hopes that the world economy has already endured the worst of the recession have boosted stock markets in recent weeks and dried up safe-haven flows into the dollar. But investors began selling the euro after it hit a monthly high near $1.3440 amid uncertainty about Thursday's ECB meeting and results of stress tests on U.S. banks. A source told Reuters about 10 U.S. banks would be told to raise more capital. "When you hear that 10 banks may need more capital, that's cause for concern, and that could put a wrench in the recent rally we've seen on Wall Street," said Matt Esteve, currency strategist at Tempus Consulting in Washington. High-yield currencies such as the New Zealand dollar clung to gains, though sterling also retreated from an earlier four-month peak against the greenback as investors sold stocks and cut back on risk and took refuge in the U.S. dollar. The yen, like the dollar, edged up, as both tend to attract safe-haven buying in times of uncertainty. The euro was last down 0.5 percent at $1.3342 after earlier hitting a one-month high at $1.3439, according to EBS. It fell 0.5 percent to 131.92 yen, while the dollar was little changed at 98.90 yen. Sterling was up 0.2 percent at $1.5055 after earlier hitting a four-month peak at $1.5161. The Australian dollar rose 0.2 percent to $0.7415 ahead of a meeting of the Reserve Bank of Australia, which markets expect will result in a decision to hold rates at 3 percent. The New Zealand dollar added 0.9 percent to $0.5803. The moves stalled a sustained rally in stock markets and high-yield currencies driven by hopes that the worst of the world recession was over. Recent data showing improved manufacturing in Europe, China and India boosted that view. Federal Reserve Chairman Ben Bernanke said Tuesday the U.S. economy was on track for a recovery but said the rebound would be slow and the jobless rate would still rise. Some in the market said they were wary of taking on too much risk ahead of Thursday's policy announcements by the European Central Bank and the Bank of England. The ECB is expected to cut its main interest rate to a record low 1 percent, while the BoE is seen holding rates at 0.5 percent, also a record low. More importantly, markets want to see whether the ECB suggests it will keep cutting rates or adopt "non-conventional" policy measures such as buying securities to stimulate growth. "Everything is a bit in limbo until we get past these two events and get U.S. payrolls data on Friday," Esteve said. Shaun Osborne, a currency strategist at TD Securities in Toronto, said the euro could resume its rally if the ECB opts not to follow the Fed and adopt non-standard monetary policy.

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