By Deborah Levine and William L. Watts, MarketWatch
NEW YORK (MarketWatch) -- The U.S. dollar declined against the euro on Tuesday, with the shared currency finding support after an auction of Irish government debt garnered solid demand.
The euro (EURUSD 1.2876, +0.0054, +0.4212%) rose to $1.2884, up from $1.2813 in late North American trading on Monday. Last week, the euro fell to a three-week low.
One euro bought 110.10 Japanese yen, up from ¥109.30.
The dollar index (DXY 82.24, -0.30, -0.36%) , a measure of the greenback against a basket of major currencies, traded at 82.158, compared with 82.535 late Monday.
The euro extended an early gain versus the dollar after Ireland's National Treasury Management Agency said it sold 1.5 billion euros ($1.9 billion) of government bonds, the maximum amount on offer.
"There is no better test of investor confidence than bond auctions and the latest from Ireland show that demand was five times more than the amount of bonds on offer," said Kathy Lien, director of currency research at GFT "The positive results have provided support for the euro."
Nervousness over the auction had mounted in recent days amid upward pressure on Irish bond yields and sovereign credit-default swaps due to concern about the cost of bailing out the nation's financial sector. Read about Irish bond sale.
An unexpected dip in the ZEW economic sentiment indicator for Germany had little lasting impact on the euro. Read about the fall in the August ZEW index.
"Euro-zone government bond auctions passed without incident and regional equity markets are trading firmly in positive territory, though the ZEW survey result shows that the currency union will find it challenging to maintain rosy growth conditions," said Geoffrey Yu, currency strategist at UBS.
Against the yen, the dollar (USDYEN 85.5900, +0.2600, +0.3047%) traded at ¥85.32, little changed from ¥85.33 in late North American trading Monday. Last week, the yen hit a 15-year high against the dollar, but has faced resistance and more comments from Japanese officials hinting at the possibility that they will intervene in markets to limit the yen's strength. Read about yen, gold.
More recent comments about further fiscal stimulus "seems to highlight the lack of political appetite at this point for yen weakening intervention and suggests that dollar-yen is likely to keep the pressure on the downside for the time being," said strategist at BNP Paribas.
That's especially true as U.S. bond yields have fallen, as the dollar-yen has tended to fall along with U.S. yields. Yields on U.S. 2-year notes (UST2YR 0.51, +0.02, +3.23%) have fallen to a record low and 10-year yields (UST10Y 2.63, +0.05, +2.02%) touched the lowest since March 2009 on Monday, then turned slightly higher on Tuesday. Read about U.S. bond yields.
BNP expects the currency pair to end the year around ¥85, then strengthen to ¥126 by the end of 2012.
British pound, inflation
The British pound (GBPUSD 1.5589, -0.0063, -0.4025%) declined 0.1% versus the U.S. dollar to $1.5624.
The Office for National Statistics said annual July consumer-price inflation slowed to a 3.1% pace from 3.2% in June, in line with expectations. The rate remains more than a full percentage point above the BoE's 2% annual target, which required BoE Gov. Mervyn King to write an explanatory letter to Chancellor of the Exchequer George Osborne.
King repeated that the central bank expected inflation to fall below target over the two-year forecasting period but emphasized the central bank stood ready to tighten or loosen monetary policy as needed. Read about British inflation.
