Brave Be The Euro Hunters. By Nicholas Hastings

Buying the euro at current levels is only for the brave.

If European bank stress tests don't knock the single currency back then a fall in global risk sentiment will.

In fact, as it heads towards $1.30, the single currency's gains are already starting to look pretty hesitant.

Fresh optimism about the global economic recovery, an extended rally in global equity markets and new hopes that the worst of the euro-zone debt crisis is over have all helped to drive the euro higher in recent days.

Also contributing to the positive mood has been a stream of comments by European officials trying to reassure investors that the stress tests that are being applied to major European banks aren't a problem.

However, as publication of the actual test details this Friday and the release of the test results themselves next Friday get closer, scepticism about the tests is starting to increase.

The tests have been designed to ease credit conditions by proving that banks are credit-worthy and strong enough to survive another debt crisis.

But uncertainty over just how good the tests are, and claims by European politicians that their banks will pass the tests whatever happens, are steadily undermining market confidence in the process.

"The continued lack of transparency regarding the bank stress tests remains a concern and claims by the German finance minister that all German banks will pass the test, including the Landesbanks, will call in to question the credibility of the process," said Hans Redeker, head of global foreign exchange at BNP Paribas.

If that happens, credit conditions in much of the euro zone will remain tight, the economic recovery will remain more protracted and the risks of further sovereign debt problems will rise again.

Successful open-market auctions by Greece, Italy and Portugal--despite a downgrade in Portugal's credit rating--have contributed this week to the market's complacency that the worst of the debt crisis is over.

Optimism has been helped by economic data from some parts of the euro zone, including Germany, suggesting that the single currency's decline earlier this year is helping the recovery.

However, most of the economic data have remained fragile with even the 0.9% rise in euro zone industrial production Wednesday coming in well below expectations for a 1.3% increase.

Certainly there is little sign that the region's recovery is anywhere near robust enough to create serious price pressures. June inflation data for the euro zone showed annual growth in core prices ticking up to 0.9% from 0.8% but a general slide is expected to continue given the vast amount of spare capacity that still exists in European industry.

There also remains considerable doubt over just how long the latest recovery in global risk appetite, which has been keeping global equity markets on the rise, will last.

A recent spate of interest-rate rises, including the latest from Thailand, have helped to feed hopes that the global recovery remains on track and that demand will continue to pick up.

But there remains considerable doubt about just how robust the U.S. economy is and whether it is still at risk from a double-dip recession.

Also, new data increasingly point to an economic slowdown in China, which could force analysts to scale back some of their optimism over the global recovery and bring an early end to the recent buying interest in risky currencies, such as the euro.

As data earlier Thursday showed, Chinese growth in the second quarter slowed even more sharply than expected to 10.3% from 11.9% in the first. The market had been looking for second-quarter growth to come in at 10.5%.

Coming after dovish minutes from the last U.S. Federal Reserve rate-setting meeting, as well as disappointing U.S. retail sales Wednesday, the news helped to encourage investors back into safe havens and push the euro a little lower.

By 0645 GMT, the single currency wad down at $1.2729 from $1.2735 late on Wednesday in New York, according to EBS. It was also down at Y112.22 from Y112.29 while the dollar slipped to Y88.13 from Y88.19.