FOREX-Euro pares gains after German business survey, Swedish crown slips
* German business morale near two-year low, caps euro's gains
* ECB stress test points to limited capital shortfall among banks
* Swedish crown dips ahead of Riksbank meeting
By Jemima Kelly
LONDON, Oct 27 (Reuters) - The euro gave up its gains against the dollar on Monday after a drop in German business morale offset better-than-expected stress-test results for European banks.
In European trading, the Swedish crown fell 0.7 percent to a six-week low against the euro. Expectations are the country's central bank will cut interest rates to a record low to ward off the threat of deflation.
In Germany, the business sentiment index compiled by the Munich-based think tank Ifo fell to its lowest in almost two years. It was the sixth straight decline for the index, which is based on a monthly survey of some 7,000 German companies ID:nL5N0SM1IN]
The euro zone's biggest economy had steamed ahead in the first quarter. But it suffered a 0.2 percent contraction in the second quarter and concern is growing that Germany will slide into a recession.
The euro was last trading at $1.2674, flat on the day . It had earlier risen above $1.27 after better-than-expected results from the European Central Bank's stress tests, which temporarily lifted some of the gloom surrounding the euro zone economy.
Twenty-five out of the euro zone's 130 top banks failed the tests at the end of last year, but most have since repaired their finances, the central bank said on Sunday.
"The market seems to continue to think the ECB is going to do more in terms of monetary policy ... and that's why euro/dollar is not going higher short-term," said Adam Myers, European head of currency strategy at Credit Agricole in London.
Myers said he expected the common currency to weaken before a crucial policy meeting of the U.S. Federal Reserve set to start on Tuesday.
"The Fed has been far more cautious recently because they don't want a stronger dollar, but even so, with the market interpreting the ECB and the European data the way they are at the moment ... the risk is that heading into the Fed, into Wednesday evening, we're going to break through last week's low."
RIKSBANK RISK
The Swedish crown fell to 9.2485 crowns per euro, its weakest since September 17, as investors sold the crown before a Riksbank interest rate decision on Tuesday. The Swedish central bank is expected to cut the repo rate to a record low of 0.05 percent, having already slashed it to 0.25 percent.
At its policy meeting across the Atlantic (Shanghai: 600558.SS - news) , the Fed is likely to reinforce its stated willingness to wait a long while before raising rates, after a volatile month in financial markets that saw some measures of inflation expectations drop worryingly low.
"The Fed will likely end its bond buying while maintaining its pledge to leave rates near zero for a considerable time. That should underpin risk assets and hamper the yen," said Minori Uchida, chief FX strategist at the Bank of Mitsubishi-Tokyo UFJ.
Having risen above 108 yen in Asian trade as risk appetite returned modestly following the ECB stress test results, the dollar fell by 0.3 percent against the safe-haven Japanese currency to 107.84 yen.
A Bank of Japan policy meeting later this week will be closely watched for clues as to whether the central bank is set to embark on another round of monetary easing. (Additional reporting by Hideyuki Sano in Tokyo; Editing by Larry King)