The dollar rose on Tuesday, rebounding from a five-month low, as worries about Germany's banks hurt the euro and as investors awaited a U.S. government debt auction to gauge foreign appetite for the greenback. The euro was also hit by plummeting share prices and weak economic data. Traders sold it after a rally last week, driven in part by concerns about that soaring deficits may threaten the United States' AAA sovereign debt rating. A new test of investor appetite for dollar assets will come this week as U.S. markets reopen after the Memorial Day holiday and as Treasury auctions $101 billion in new debt. For now, though, the dollar got a reprieve after British media reported that Germany's financial regulator 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. "The euro really sold off earlier after reports on the German banking system, but in the U.S., with the absence of significant data releases, the focus will be on the supply side with the Treasury auctions," said George Davis, a director for foreign exchange at RBC Capital Markets, in Toronto. In morning trading in New York, the euro fell 0.8 percent to $1.3893, after touching a session low of $1.3859, according to Reuters data. On Friday it rose as high as $1.4051 on trading platform EBS, its highest since early January, marking a rise of about 8 percent from $1.30 in the past month. Davis said weaker-than-expected foreign participation in this week's Treasury auctions could spur euro buying back to the $1.4050 level. The U.S. government will sell two-year notes on Tuesday, five-year notes on Wednesday and seven-year paper on Thursday. The dollar index .DXY, a gauge of the greenback's performance against six other major currencies, was up 0.6 percent on the day at 80.509. On Friday, it fell to a 2009 low of 79.805, a day after a downward revision on the outlook for Britain's AAA sovereign rating prompted speculation the U.S. government debt may lose its top-notch rating. GERMAN BANKS Britain's Daily Telegraph said Germany's financial regulator BaFin warned last week that German banks have bad assets of about $280 billion. David Powell, a G10 currency strategist at Bank of America-Merrill Lynch in London said the story was enough to encourage traders to book profit from the euro's rise above $1.40 last week. "It's certainly adding to the negative euro outlook (today)," Powell said. Figures on Tuesday confirmed Germany's economy shrank in the first quarter at its fastest pace since reunification in 1990, while euro zone industrial new orders fell unexpectedly in March. On Monday, German-based Ifo think tank's business climate index also fell short of market expectations. The euro was down 0.9 percent on the day at 131.61 yen, having hit a low of 131.49 yen. North Korea's missile test on Tuesday, coming in the wake of its latest nuclear test, prompted limited market reaction. The dollar was down 0.1 percent against the Japanese currency at 94.72 yen.

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