FOREX-Dollar off 5-month low, U.S. debt auctions awaited

TOKYO, May 26 (Reuters) - 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 U.S. 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's bad bank plans to prepare for 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 U.S. and British financial markets will resume trading later in the day after a three-day weekend.

The dollar index .DXY, a gauge of the greenback's performance against six other major currencies, edged up 0.2 percent to 80.146.

The index struck a five-month trough of 79.805 last week when concern that U.S. government debt may lose its AAA rating prompted investors to sell the world's reserve currency.

The euro fell to $1.3986 , 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 132.49 yen down almost 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.

Dollar extends slide but Asian stocks gain

HONG KONG (Reuters) - The dollar fell on Friday to its weakest in almost five months against major currencies on investor worries that the United States would lose its AAA rating, though Asian stocks headed for a solid weekly gain.

The dollar's descent was sparked on Thursday when Standard & Poor's cut its outlook on Britain's top rating to negative, bringing into focus other AAA-rated countries that are running into higher debt in an attempt to boost their economies with big spending plans.

Although signs of hope in the global economy are helping to support Asian stocks, worries are also growing about the strength of any recovery and whether the shift into riskier asset such as oil is justified.

A weaker dollar is also strengthening Asian currencies, which is bound to hurt the export-dependent continent and further raise doubts among investors about whether a gain of more than 50 percent in Asian shares excluding Japan since early March is excessive.

"Markets all around the world appear to be looking for direction, and any chance of a U.S. downgrade would really hit U.S. assets such as the dollar and stocks," said Masayoshi Okamoto, head of dealing at Jujiya Securities.

"For Japan, this situation comes just after earnings have come out and companies have set their currency rates, many of them at 95 yen. The chance of any further yen rise really paints a gloomy picture."

The dollar index .DXY, a gauge of its performance against six major currencies, fell as low as 80.257, its weakest since late December and was last down 0.2 percent at 80.302.

The slide in the U.S. currency comes as investors are finding it harder to ignore the effect of the Federal Reserve's zero interest rate policy and its efforts to keep long-term rates low through direct purchases of U.S. government debt.

The dollar slipped 0.3 percent from late U.S. trade to 94.08 yen after falling as low as 93.86 yen on trading platform EBS, its lowest since mid-March.

The euro rose 0.4 percent to $1.3945, its strongest since early January. Sterling, despite the S&P action, rose as high as $1.5893, its highest since early November according to Reuters data, and was last up 0.2 percent at $1.5885.

"S&P gave a clear criteria that a country whose government debt burden is approaching 100 percent of GDP could have its rating downgraded," said Hideki Amikura, deputy general manager of forex trading at Nomura Trust and Banking.

"That prompted investors to think they should not be so optimistic about credit rating on the United States."

But U.S. Treasuries recovered after concerns about debt levels sent prices tumbling on Thursday. The Treasury's announcement that it would sell $101 billion in notes next week also sparked supply concerns.

Benchmark 10-year U.S. Treasury notes rose about one point, sending yields down to 3.34 percent from the 3.37 percent level hit on Thursday that had marked the highest yield on an intraday basis in nearly two weeks.

Market Commentary

MARKET COMMENTARY ON 22ND MAY 2009

GBP/USD closed higher due to short covering on Thursday as it extends yesterday's high range. The high-range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI are turning bullish signalling that sideways to higher prices are possible near-term. Closes below the 20-day moving average crossing would temper the near-term friendly outlook in the market. If it renews this month's rally, March's high crossing is the next upside target.

EUR/USD closed higher due to short covering on Thursday as it extends yesterday's high range. The high-range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI are turning bullish signalling that sideways to higher prices are possible near-term. Closes below the 20-day moving average crossing would temper the near-term friendly outlook in the market. If it renews this month's rally, March's high crossing is the next upside target.

USD/CHF closed higher due to short covering on Thursday as the dollar weakened. The high-range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI are turning bullish signalling that sideways to higher prices are possible near-term. Closes below the 20-day moving average crossing would temper the near-term friendly outlook in the market. If it renews this month's rally, March's high crossing is the next upside target.

USD/JPY closed higher due to short covering on Thursday as the dollar weakened. The high-range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI are turning bullish signalling that sideways to higher prices are possible near-term. Closes below the 20-day moving average crossing would temper the near-term friendly outlook in the market. If it renews this month's rally, March's high crossing is the next upside target.

Market Commentary

MARKET COMMENTARY ON 19TH MAY 2009

GBP/USD closed higher on Monday and the high-range close sets the stage for a steady to higher opening on Tuesday. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near-term. If June extends the rally off April's low, December's high crossing at 1.5545 is the next upside target. Closes below the 20-day moving average crossing at 1.4957 would confirm that a short-term top has been posted.

EU/USD closed higher due to short covering on Monday and above the 10-day moving average crossing at 1.3520. The high-range close sets the stage for a steady to higher opening on Tuesday. Stochastics and the RSI are turning bearish signaling that additional profit taking is possible near-term. Closes below the 20-day moving average crossing at 1.3350 would temper the near-term friendly outlook in the market.

USD/CHF closed higher due to short covering on Monday and above the 10-day moving average crossing. The high-range close sets the stage for a steady to higher opening on Tuesday. Despite today's rebound, stochastics and the RSI remain bearish signaling that sideways to lower prices are possible near-term. Closes below the 20-day moving average crossing would confirm that a short-term top has been posted. If June renews the rally off April's low, the 75% retracement level of last fall's rally crossing is the next upside target.

USD/CAD closed higher on Monday due to short covering as it consolidated some of last week's decline and closed above the 10-day moving average crossing. The high-range close sets the stage for a steady to higher opening on Tuesday. Stochastics and the RSI are turning neutral signaling that sideways trading is possible near-term. If June renews the rally off March's low, the 50% retracement level of the 2008-2009 decline crossing is the next upside target.

USD/JPY posted a key reversal down due to profit taking on Monday as it consolidated some of last week's rally. The low-range close sets the stage for a steady to lower opening on Tuesday. Stochastics and the RSI are overbought and are turning neutral hinting that a short-term top might be in or is near. Closes below the 20-day moving average crossing at 99.80 would confirm that a short-term top has been posted. If June extends this month's rally, March's high crossing at 100.25 is the next upside target.