FOREX-U.S dollar, yen pare losses for bank stress test

* U.S. dollar steadies after bounce, yen edges up

* Risk appetite ebbs ahead of banks' stress test results

* Euro on defensive ahead of ECB meeting on Thursday

By Anirban Nag

SYDNEY, May 6 (Reuters) - The U.S. dollar steadied on Wednesday after rebounding from one-month lows against the euro, while the safe-haven yen inched up as anxiety about the results of U.S. bank stress tests saw investors pare riskier trades.

Stocks paused for breath from a rally which took them to multi-month highs, amid renewed worries about the financial sector and more fund raising by banks. Trading, though, was thin with Japan shut until Thursday for Golden Week holidays. The U.S. government stress test results are due on Thursday and could show about 10 of the 19 largest U.S. banks under review would need to raise more capital. See [ID:nN04395186].

"The bank stress tests might rattle market confidence and the recent outbreak of optimism might be due for its own stress test," said David Watt, senior currency strategist at RBC Capital Markets.

"It is hard to say if markets are losing their taste for risk, or whether they are stuffed after feasting on risk in recent days."

The euro EUR= lapsed to $1.3302 from a one-month $1.3437 peak, and weaker than $1.3324 late in New York on Tuesday. The dollar index .DXY edged up to 84.138, from a five-week low of 83.496, while the yen JPY= was firm on the major crosses.

The euro fell to 131.23 yen EURJPY= from 131.68 yen late on Tuesday, while the Aussie slipped to 72.98 yen AUDJPY=R from 73.31 yen in New York and off a seven-month high of 73.97 yen.

Commodity-linked currencies like the Australian AUD=D4 and New Zealand dollars NZD=D4 eased from recent highs, as risk appetite waned.

Both currencies have rallied in the past few sessions as investors grew confident that the worst in the global economy may have passed.

U.S. Federal Reserve Chairman Ben Bernanke said on Tuesday the world's largest economy was on track for a recovery but said the rebound would be slow and the jobless rate would still rise. [ID:nN05470010].

Minneapolis Fed Bank President Gary Stern echoed the same, saying a recovery is likely not "too far off. See [ID:nNYS005041].

But the market maybe wary of taking on too much risk ahead of Thursday's policy announcements by the European Central Bank (ECB) and Bank of England (BoE).

The ECB is expected to cut its main interest rate to a record low of 1 percent, while the BoE is seen holding rates at 0.5 percent, also a record low.

But, more importantly, markets want to see if the ECB suggests it will keep cutting rates or adopt quantitative easing measures, following the Fed's footsteps, to stimulate growth. (Editing by Wayne Cole)