FOREX-Euro hits 12-wk high; helped by data, month-end demand

* Euro trades above $1.31 for first time since early May

* Focus now on whether euro can climb above $1.3125

* Investors buy euros before month-end

(Adds comments, details. Updates prices)

By Vivianne Rodrigues

NEW YORK, July 29 (Reuters) - The euro hit a 12-week high against a broadly weaker dollar on Thursday as month-end demand and supportive data helped push the single currency above a key technical barrier.

The euro's advance started early in the session after a jump in euro zone economic sentiment to a 28-month high and a decline in German unemployment. [ID:nLDE66S0VN] [ID:nLDE66S0PL]

This contrasted with recent weak data from the United States that has weighed broadly on the dollar. Investors aremindful of figures on Friday expected to show slower second quarter growth in the world's largest economy.

The lackluster U.S. data has reinforced the view benchmark interest rates will remain at record lows in the country well into 2011, while euro-denominated assets still offer higher returns to investors.

Investors who had been wary of buying the euro before Europe's bank stress test results picked up the currency before month end, as ongoing short covering also helped the euro.

Investors sold dollars before the end of the month to hedge the currency exposure on their holdings of U.S. assets, Citibank analysts said.

Euro gains accelerated once the currency went over $1.3050, a level in which automatic buy-orders were triggered, forcing investors to unwind bets against the euro, traders said.

"There are a lot of orders in the $1.3050 area which had been targeted. When those were triggered it made for a higher euro/dollar," said Lutz Karpowitz, strategist at Commerzbank in Frankfurt.

In late morning in New York, the euro EUR= was up 0.6 percent at $1.3065, its strongest since May 4. The single currency briefly traded at $1.3106.

EURO SHORTS UNWIND

Traders cited demand for euros from an Asian central bank in early European trade and they also welcomed news that the Italian government's 25 billion ($32.54 billion) package of austerity measures cleared a final hurdle. The package is indented to shore up Italy's public finances. [ID:nTST002405]

"Economic resilience in Europe... despite the formidable sovereign credit headwinds, continues to fuel an unwinding of bets against the euro and push it higher across the board," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange, in Washington, D.C.

But Esiner warned that while the euro is likely to enjoy continued support over the near-term, especially if U.S. data remains weak, its gains may prove limited if concerns about a slowing U.S. economy widen to include the broader global economy.

The dollar index .DXY fell 0.7 percent to 81.535.

The euro has risen around 7 percent versus the dollar this month. A upcoming trading target for the single currency is seen at $1.3125, the 38.2 percent Fibonacci retracement of the peak-to-trough move from November 2009 to June.

MONTH-END EURO DEMAND

In a note, Citibank analysts said investors continued to buy U.S. equities into the end of July as U.S. stock markets outperformed other global equities.

This suggests that investors will be on balance net sellers of dollars to bring their hedges in line with the increased value of their U.S. assets," they said, adding that the signal to sell dollars was "quite strong".

The New Zealand dollar NZD=D4 rose 0.4 percent to $0.7231, recovering from an earlier fall after the central bank raised interest rates by a quarter point, as widely expected, but warned that further hikes could be more gradual. [ID:nSGE66P0N3]

The New Zealand dollar's recovery was aided by a rise in the Australian dollar AUD=D4, which climbed more than 1 percent to $0.9004. (Additional reporting by Naomi Tajitsu; Editing by Andrew Hay)