* Dollar softer after tame U.S. inflation data
* Question whether dollar short-covering letting up
* Ireland agrees to work with EU-IMF mission
By Charlotte Cooper
TOKYO, Nov 18 (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 rose above resistance around $1.3560-70
<EUR=>, pushing up as far as $1.3594, 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.
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Description of EU safety net: []
How Ireland might tap funds: []
Euro zone debt struggles: http://r.reuters.com/hyb65p
Multimedia coverage: http://r.reuters.com/hus75h
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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 rose 0.4 percent from late New York levels at
$1.3589, tackling its 55-day moving average around $1.3590.
Still, it is down some 5 percent from a 10-month high above
$1.4280 set on Nov. 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 <JPY=> this month, held at 83.32 yen. There was
some talk of stop loss buy orders at 83.70 yen.
Some traders say that dollar/yen could rise to around 85 yen
on the back of widening in the U.S.-Japan yield gap, with which
it has had a high correlation.
"On the whole, the market is still correcting its excessive
expectations about the Fed's quantitative easing. It's hard to
think now that the Fed will do QE III and IV after QE II," said
Etsuko Yamashita, chief economist at Mitsui Sumitomo Banking
Corp.
Traders also say hedge funds are likely to continue to close
their dollar short positions ahead of their book-closing later in
the year.
The dollar index <.DXY>, 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 to
around $0.9850 <AUD=D4>, 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.
(Additional reporting by Hideyuki Sano in Tokyo and Ian Chua in
Sydney, and contributions by Reuters FX analysts Krishna Kumar in
Sydney and Rick Lloyd in Singapore; Editing by Joseph Radford)
