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.