By Charlotte Cooper TOKYO (Reuters) - The dollar's rally to seven-week highs stalled on Thursday after it failed at chart resistance and after subdued U.S. inflation data reinforced the Federal Reserve's case for easing, making dollar short-covering pause. Uncertainty about Ireland's debt crisis, which also helped support the dollar recently, looked to be loosening its grip on markets after Dublin agreed to work with a European Union-IMF mission on urgent steps to shore up its shattered banking sector. Currencies are see-sawing as year-end book-closing has prompted a lot of short-dollar positions built up over the past couple of months to unwind and as Europe's debt problems have returned to the fore, exacerbating losses in the euro. The single currency tested resistance around $1.3560-70, pushing up as far as $1.3583, where a sustained break would signal a move up to $1.3650-70. However failure to hold the move above $1.3560-70 could open up a retest of this week's seven-week low at $1.3446. One trader said there were euro bids below $1.3450 but with some stop loss sell orders just below $1.3500. "I suspect Ireland will take some sort of aid package this week or next week and that'll probably see the euro make up some gains in the near term," said Joseph Capurso, strategist at Commonwealth Bank. Still the market was subdued with plenty to keep it uncertain, with some analysts noting that even if there was a quick resolution over Ireland, the market would continue to fret about other peripheral euro zone economies and their debt levels. In addition, speculation that China may tighten monetary policy was keeping appetite for risk subdued. The euro was 0.4 percent up from late New York levels at $1.3578 but is down some 5 percent from a 10-month high above $1.4280 set on November 4. U.S. core consumer inflation climbed 0.6 percent from a year ago, marking the smallest increase since records started in 1957 and arguing in favour of the Fed delivering all of its $600 billion of quantitative easing, after stronger data had fuelled doubts it would need to follow through on the entire programme. The dollar, which gained 4 percent from a 15-year low to a high of 83.60 yen this month, held at 83.32 yen. There was some talk of stop loss buy orders at 83.70 yen. One trader said however the dollar was keeping track of yield differentials and that dollar/yen could rise to around 85 yen given the U.S.-Japan yield gap. Others were less sure, noting that the rate differential had widened but was already narrowing this week. "Japanese yields should stabilise but I'd be cautious to chase the rally of dollar/yen from here," said Masafumi Yamamoto, chief FX strategist at Barclays Capital in Tokyo. The dollar index, which tracks the greenback's performance against a basket of major currencies, retreated below 79.00 from a seven-week high of 79.461. The index faces significant resistance levels up at 79.55-80.05 and while it failed there this week, a break higher would be bullish for the dollar. The softer greenback helped the Australian dollar pop above $0.9800, up from this week's low around $0.9726. But growing expectations that China, Australia's largest export market, will take steps to tackle inflation, including a rate rise as early as this week, could limit the Aussie's upside.

Source