FOREX-Dollar hits 2009 low vs euro, currency basket

* Euro/dollar hits 5-mth high, dlr index slumps to 2009 low

* Dollar selling momentum persists as risk demand rises

* Sterling, Aussie rally, yen suffers

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LONDON, June 3 - The dollar hit a five-month low against the euro on Wednesday and hovered near its lowest of the year against a currency basket as traders continued to dump the U.S. currency for higher-risk ones due to ongoing speculation the global economy may be recovering. The dollar-dumping trend from the past month or so remained firmly intact, with the U.S. currency also hitting its weakest levels since autumn against sterling and the Australian dollar. The euro climbed as high as $1.4337 according to Reuters data, its strongest since December, before pulling back slightly as European share prices slipped in early trade.

Investors offered limited initial reaction to a final reading of euro zone services PMI, which was revised up to a seven-month high of 44.8 in April from an initial reading of 43.8. Forecasts had been for 44.7.

Analysts said the weak dollar trend was rock-solid for the moment, pointing out traders had dumped the U.S. currency on the back of surprisingly strong U.S. housing data, while brushing off comments from the United States that China expects the dollar will remain the world's reserve currency. "The dollar-negative sentiment is set to continue for the moment, and it's dangerous to go against the trend," said Antje Praefcke, currency strategist at Commerzbank in Frankfurt.

"Even data showing that the U.S. economy is improving can't help the dollar because the market doesn't want it to."

By 0814 GMT, the euro was down 0.2 percent at $1.4260.

The pair retreated from the five-month high hit in early European trade as regional shares fell 0.6 percent, but analysts said traders would test stop-loss orders seen around the mid-$1.43 region, which may open the way to more euro gains.

The dollar's trade-weighted index, which tracks its movements against a basket of six other currencies, was at 78.598, little changed on the day but sticking close to 78.334 hit the previous day, its lowest since mid-December.

The Australian dollar rallied to $0.8265, its highest since late September. It was broadly boosted after data showed the nation managed to avoid recession in the first quarter of the year and grew more than expected.

Sterling continued to rally on the back of dollar weakness, hitting its highest since October at $1.6664.

The dollar slumped versus most currencies, but rose 0.7 percent to 96.30 yen as the yen suffered across the board due to the overall trend for higher-risk assets.

The Swedish crown remained under selling pressure after tumbling against the euro earlier in the week on concerns about the possible devaluation of currencies in the Baltic region as their economies continue to suffer.

Sweden is seen vulnerable to the health of the region's economy, given its heavy investment in the area.

BERNANKE AWAITED

The dollar's fall has gained steam in past weeks, as improving risk appetite and worries about ballooning U.S. debt issuance led to a decline in safe-haven demand for the dollar.

The dollar extended its losses in the wake of data the previous day that showed U.S. pending home sales posted their biggest jump in 7-1/2 years in April, suggesting the U.S. housing market, which is key to an economic revival, is on the mend and reinforcing optimism about a global economic recovery.

Investors awaited testimony from U.S. Federal Reserve Chairman Ben Bernanke, who will speak before the House of Representatives Budget Committee at 1400 GMT.

The market is waiting for clues on whether the Fed will increase or speed up purchases of longer-dated Treasuries to keep down interest rates.

Analysts say recent dollar weakness has in part been due to rising U.S. Treasury yields, which has tarnished the appeal of U.S. government debt to some overseas investors.

The benchmark 10-year Treasury note yield has risen about 100 basis points to 3.61 percent since the Fed said in March it would buy longer-dated paper, and analysts say a yield of 3.5-4 percent would eventually lead to higher mortgage rates.

"If Bernanke shows a less proactive attitude than market expectations toward increasing the size of purchases of government debt at the Fed's next meeting, long-term interest rates could rise and that could lead the dollar lower," said Tohru Sasaki, chief FX strategist at JP Morgan in Tokyo.