* Dollar hits lowest level of the year vs currency basket
* UK bank earnings lift Europe shares to year's high
* Sterling, Aussie, kiwi, CAD hit multi-month highs
(Recasts throughout, adds comments. Changes byline and dateline, previous LONDON)
By Vivianne Rodrigues
NEW YORK, Aug 3 (Reuters) - The dollar hit its lowest level of the year against a basket of currencies on Monday, stung by buoyant risk demand as stocks rallied on the back of solid bank earnings and surprisingly strong manufacturing sector data from Europe.
Higher-yielding currencies climbed as European shares hit their highest levels of 2009 after results from HSBC Holdings PLC and Barclays PLC, while strong purchasing managers' indexes from the euro zone and Britain added to evidence that the worst of the global economic downturn may be over.
In the U.S., stock futures also pointed to a higher opening on expectations of a rebound in sales for Ford Motor Co
The euro hit a two-month high against the dollar of $1.4326 according to Reuters data, while sterling and the Australian and New Zealand dollars hit their strongest since autumn.
"We are seeing broad dollar weakness at the start of the week as commodity and other higher yielding currencies jump," said Matthew Strauss, a senior currency strategist at RBC Capital Markets in Toronto. "The effect of strong bank earnings in Europe earlier in the session is spilling over into the U.S., giving further support to the euro."
The dollar index, a gauge of the U.S. currency's performance against six other major currencies, fell to 77.928 earlier, its lowest since December, as oil prices rallied more than 2 percent to a one-month high above $71 per barrel.
"The outperformance of pro-cyclical currencies against the dollar has to do with not only with higher equities but oil prices as well," said Phyllis Papadavid, a currency strategist at Societe Generale in London.
Also helping to batter the U.S. currency was a jump in European shares to their highest since November as HSBC reported that profits halved from a year ago, but were still ahead of forecasts.
HSBC's announcement followed Barclays report of an 8 percent rise in half-year profit, though bad debts at the bank almost doubled.
HEAVY DATA CALENDAR
Market focus turns to the release of a key U.S. Institute for Supply Management survey on manufacturing activity, which is expected to show a rise to 46.2 in July from 44.8 in June.
"This week is heavy on data releases, and investors will once again focus on the economic activity instead of strictly on earnings," said Strauss. "If the U.S. data is not a disappointment, the forex market may build momentum to push euro/dollar through the 1.44 level."
A UK purchasing managers' index for manufacturing rose to 50.8 in July, moving into positive territory for the first time since March 2008, while an equivalent survey on the euro zone was also better than expected, further lifting optimism on the global economic outlook.
Sterling rose to its highest since late October of about $1.6879, helped by both the UK banking earnings and the surprisingly strong UK PMI reading.
Among commodity-linked currencies, the Australian dollar hit its highest since late September at $0.8415 while the New Zealand dollar rose to $0.6682, its strongest since October. The Canadian dollar rose as high as C$1.0657 per U.S. dollar.
Traders said the Aussie was being supported by expectations that the Reserve Bank of Australia may drop a key reference on monetary easing at its policy meeting on Tuesday while keeping the cash rate unchanged at 3 percent.
Markets are also anticipating policy decisions from the Bank of England and the European Central Bank later this week.