Dollar off five-month low

The dollar rose from a five-month low against a basket of currencies on Tuesday as investors booked profits on a spike in the euro and other higher-yielding currencies, while traders awaited US Treasury auctions to test the strength of investor appetite for dollar assets.
The euro slid against the dollar and the yen after Britain's Daily Telegraph reported that Germany's financial regulator BaFin had warned that toxic debt of the country's banks would blow up "like a grenade" unless they took advantage of government bad-bank plans to prepare for the next phase of crisis. The report was not new, however, as the regulator warned last week that German banks have bad assets of around 200 billion euros ($280 billion).
Traders said speculators used the report as an excuse to sell the European single currency after its jump of about 8 percent in just a month against the dollar, from $1.30 to $1.40. "The euro, the Australian dollar and sterling all have risen to levels where people would feel they have run their course for now," said Osamu Takashima, chief currency analyst at Bank of Tokyo-Mitsubishi UFJ. "It's understandable to see profit-taking on them."
Activity picked up in Asia as US and British financial markets will resume trading later in the day after a three-day weekend. The dollar index, a gauge of the greenback's performance against six other major currencies, edged up 0.2 percent to 80.156.
The index struck a five-month trough of 79.805 last week when concern that US government debt may lose its AAA rating prompted investors to sell the world's reserve currency. The euro fell to $1.3975, down from $1.4023 in late Asian trade on Monday. It rose as high as $1.4051 on trading platform EBS on Friday, its highest since early January.
The euro was also under pressure a day after the German-based Ifo think tank's business climate index on Monday fell short of market expectations, suggesting that any recovery in the euro zone's biggest economy will take more time. The European single currency fell to 132.25 yen down more than 1 yen from late Asian trade on Monday, as funds took profits on the euro's sharp gains against the yen in the past week.
Among higher-yielding currencies, the Australian dollar dipped 0.4 percent on the day to $0.7786, pulling back from a near eight-month high of $0.7868 hit last week. The dollar traded at 94.65 yen, down from 95.10 yen in the previous day's late Asian trade, edging towards a two-month low of 93.85 yen on trading platform EBS hit on Friday.
The market reacted calmly after North Korea on Tuesday accused the United States of being hostile and was reportedly ready to test-fire more short-range missiles. The yen fell broadly the previous day on news that North Korea had conducted a nuclear test, which was seen as negative for the currency given Japan's geographical proximity to Pyongyang.
"In past cases in the beginning the market pays attention but afterwards, even if the United Nations comes up with a statement, the market will not pay much attention any more," said Masafumi Yamamoto, head of FX strategy Japan at Royal Bank of Scotland.
"The basic (market) assumption is that North Korea is not really thinking of attacking Japan or a US military base or South Korea, it's just a kind of threat," Yamamoto said. One focal point in the market this week is the US Treasury's debt auctions totalling $101 billion. The government will sell two-year notes today, followed by a five-year auction on Wednesday and a sale of seven-year notes on Thursday.
"Dollar selling is likely to gather pace if the Treasury auctions meet only lukewarm demand, causing long-term Treasury yields to climb," said Yoshihisa Kanzaki, a trader at Shinkin Central Bank. "Investors will focus on the fact that higher interest rates would hamper a recovery in the US housing market and the broader economy," Kanzaki said.