FX OUTLOOK-Bank stress tests to keep investors cautious

* Euro zone bank stress tests to be released Friday

* Euro sees resistance at $1.31; break opens door to $1.34

* Dollar/yen approach 15-year low

By Wanfeng Zhou

NEW YORK, July 16 (Reuters) - The euro's rally over the past month could hit a speed bump next week as investors turn cautious ahead of the release of European banks' stress test results.

The dollar, however, is unlikely to benefit, analysts said, as a round of U.S. housing data looks set to reinforce worries about the outlook for the American economy in the second half of the year.

On Friday, the euro rose above $1.30, an important psychological level, for the first time since May. It has rebounded 5.7 percent this month as smooth bond auctions in Portugal, Germany and Greece eased worries about the euro zone's debt crisis.

Results next Friday of stress tests on 91 banks across 20 countries will give an indication of how Europe's banking system would cope with another downturn and losses on Greek and other government bonds. For details, see [ID:nLDE6601T6]

"The central issue of sovereign debt risk comes back to the forefront next week and the market will be a little bit wary ahead of these stress tests results," said Boris Schlossberg, director of currency research at GFT Forex in New York.

"We're reaching some pretty critical resistance points at the $1.30 and $1.32 levels. The possibility of the euro stalling here a little bit is quite likely," he added.

International Monetary Fund chief Dominique Strauss-Kahn said on Friday the stress tests should not reveal any major problems among the big names, although it was possible some smaller banks would have to be recapitalized.

The impact on the euro from the results could be limited, analysts said.

"The euro is trading as much on anti-dollar flows as it is on euro supportive ideas," Schlossberg said. "The market is not expecting any sort of radically bad news, but in order for the euro to really continue its rally, you would need to see a positive surprise out of the stress tests."

EURO EYES $1.34

The euro last traded at $1.2929, flat on the day, after reaching a session peak of $1.3008 on electronic trading platform EBS EUR=EBS.

James Chen, chief technical strategist at FX Solutions in Saddle River, New Jersey, said the next key upside resistance for the euro/dollar is $1.31. "Any significant breakout above $1.31 would be a considerably bullish indication, with further potential upside to $1.34," he said.

Axel Merk, president and chief investment officer at Merk Investments in Palo Alto, California, said fundamentally, the euro zone is addressing its challenges, which means "selling the euro is no longer a risk-free trade."

"By all means, not all is perfect in the euro zone, and not all reforms will be implemented," he said. "But when I look around, most are still deeply negative on the euro. This suggests the rally may have much further to go than most are anticipating."

DOLLAR BEARS

The U.S. economic calendar is relatively light next week, with housing starts and building permits due out on Tuesday and existing home sales on Thursday.

The dollar has stumbled in recent weeks as the market shifted its focus from bad news from Europe to risks of a sluggish U.S. recovery and the currency's diminishing yield appeal

Market participants will also be keen to see if the dollar falls to a 15 year low by breaching the November 2009 trough of 84.81, according to Reuters data.

The yen's latest rise has brought it to levels that could cause pain to Japanese exporters if its gains are sustained, with the BOJ's tankan survey showing the average forecast for the dollar/yen rate in the year to next March among large manufacturers is 90.18 yen.

The dollar last traded at 86.47 yen, down 1.1 percent on the day. The pair has declined 2.5 percent this week, the biggest weekly drop since late February. (Editing by Andrew Hay)