FOREX-Euro at 3-week high; move to risky assets saps dollar, yen

* U.S. dollar, yen on softer footing; euro at 3-wk highs

* Risk appetite helped by better U.S. data, earnings

* Focus on Bernanke's testimony, eyes on exit strategies

By Anirban Nag

SYDNEY/SINGAPORE, July 20 (Reuters) - The U.S. dollar and the yen ceded further ground on Monday as concerns about the U.S. economy abated and broadly improved corporate earnings lifted risk appetite and regional stock markets.

Hopes of better corporate earnings in the U.S. underpinned regional share markets and saw the MSCI index of Asian Pacific stocks <.MIAPJ0000PUS> outside Japan hit a 2009 high.

Sentiment was also helped by news that the CIT Group had reached a tentative deal with bondholders which could allow it to stave off bankruptcy. [nN15377144].

Volumes were light with Tokyo shut for a local holiday. The dollar index <.DXY> -- the dollar against a basket of six currencies -- was down 0.2 percent, having shed 1 percent last week, its worst week since May 24.

The euro rose as far as $1.4180, Reuters data showed, firmer than late Friday's $1.4107 and its highest level since July 1.

High-yielding currencies such as the Australian and the New Zealand dollars made solid gains, rising about 0.6 percent each.

The dollar was at 94.56 yen , up from 94.26 late Friday, while the euro jumped against the yen to its highest since July 7, trading at around 134 yen.

"The earnings and data from the housing sector suggest the U.S. economy is showing signs of a recovery although investors are still reluctant to pour capital in to it," said Richard Grace, senior currency strategist at Commonwealth Bank of Australia, Sydney.

Growing expectations of a recovery in the U.S. economy have sent investors searching for higher yields. Last week, financial stalwarts Goldman Sachs Group Inc and JPMorgan Chase & Co reported better-than-expected results, although that was offset by news that General Electric profits fell by half and Bank of America posted a lower quarterly profit.

Companies reporting this week include American Express Co , Apple Inc , Boeing Co , Caterpillar Inc , Coca-Cola Co , DuPont Co , McDonald's Corp and Microsoft Corp .

FOCUS ON BERNANKE, JAPAN POLITICS

While the headline numbers have masked increased job cuts and falling capital expenditure, investors have chosen to pay more attention to the positive economic reports such as a surprising rise in U.S. housing starts in June and stronger-than-expected retail sales.

There is little U.S. data to drive the market this week, so the focus will be on Federal Reserve Chairman Ben Bernanke's semi-annual monetary policy testimony to Congress.

Investors will be seeking clues on whether the Fed will begin unwinding some of the huge stimulus measures it undertook at the height of the U.S. financial crisis.

If that signal comes, investors will perceive it as evidence that the U.S. economy could soon show positive growth and bolster risk appetite.

Bernanke may sound more confident about the economy after the Fed last week said the recession would not be as deep as feared in 2009 and the recovery next year may be stronger than expected.

Still, analysts expect any exit strategy to be cautious and likely to be carefully managed, given the downside risks from rising unemployment.

"While the chairman needs to articulate how and why exiting the current stance need not prove destabilizing, he will want to steer clear of triggering expectations that an active return to traditional interest rate setting is close at hand," said Robert DiClemente, economist at Citi.

"Over time, we would expect that the greater concern for financial markets will not be inflation or monetary policy but the troubling arithmetic around fiscal sustainability."

Another big event this week could be Japanese Prime Minister Taro Aso's dissolution of parliament's lower house on Tuesday for a Aug. 30 election he has already called.

The opposition Democratic Party is leading in opinion polls and if it wins it would end more than 50 years of almost unbroken rule by the ruling Liberal Democratic Party.

The dissolution of the lower house itself would have negligible impact on the already volatile yen, analysts said.

"The bigger focus will be whether a new government in Japan, if that is what results, decides to shift Japan's reserve investment strategy away from the dollar," said HSBC's head of strategy in Asia, Richard Yetsenga.

"So the dollar itself is likely to be the area of focus."

Neither of the two main parties have suggested any changes in Japan's foreign exchange reserves policy.

Rintaro Tamaki, Japan's new vice finance minister, has said the U.S. dollar will remain the key currency and Japan will support that policy. The Democratic Party has likewise said a change in government will not mean the weightage of dollars in Japan's reserves has to change.

(Additional reporting by Vidya Ranganathan; Editing by Wayne Cole and Kim Coghill)