* Dollar rebounds from 5-month lows
* US consumer confidence rises sharply in May
* U.S. 2-year Treasury auction well-received
* Concern over German economy, banks keeps euro down
* Analysts say mood still favors risk, selling dollar
(Recasts; adds details, changes byline)
By Steven C. Johnson
NEW YORK, May 26 (Reuters) - The dollar rose against the
yen on Tuesday after data showed improvement in U.S. consumer
confidence while worries about Germany's economy and banks
knocked the euro off last week's near five-month high.
The euro's slide was fairly shallow, however, and by
midday, the currency had erased most of its losses against the
dollar to trade near $1.40 as Wall Street rallied and the
strong U.S. data encouraged investor risk appetite.
Signs of improved economic growth have kept the dollar
under pressure for weeks, and selling reached a crescendo last
week when investors started to worry a soaring U.S. deficit
could eventually imperil the United States' AAA credit rating.
But fears that foreigners would sour on U.S. government
debt eased on Tuesday after a U.S. Treasury auction of two-year
notes attracted solid demand. For details, see []
"The focus on the AAA rating of the United States was
overblown and was only a proximate cause of the dollar sell-off
last week," said Michael Woolfolk, senior currency strategist
at The Bank of New York-Mellon. "We've been seeing a move into
risky assets for weeks now. Nothing has really stopped that."
Melvin Harris, market strategist at New York-based Advanced
Currency Markets, added: "There's been so much talk about the
U.S. rating being downgraded, but to be honest, even if this
happened -- and I don't think it will -- the U.S. is not going
to default. That shouldn't be the prompt to sell dollars."
The dollar was last up 0.1 percent at 94.95 yen <JPY=>
after earlier dipping as low as 94.52 yen, according to Reuters
data. The euro was down 0.3 percent at $1.3969 <EUR=> while
sterling was up 0.1 percent at $1.5929 <GBP=>.
The Norwegian crown fell sharply against the dollar <NOK=>
and euro <EURNOK=> as oil prices earlier eased and Norway's
central bank urged commercial banks to build up their capital
cushions.
The euro, which last week hit its highest level since early
January, earlier retreated to $1.3859 after data confirmed
Germany's economy shrank in the first three months of the year
at its fastest pace since reunification in 1990. []
The euro also weakened after a UK newspaper quoted
Germany's financial regulator as saying German banks' toxic
debt could blow up "like a grenade," though a spokesman for the
regulator later denied these words were used. []
David Powell, a G10 currency strategist at Bank of
America-Merrill Lynch in London said the story was enough to
encourage traders to book profits from the euro's rise above
$1.40 last week.
"It's certainly adding to the negative euro outlook" today,
Powell said.
Overall, though, analyst said the mood was still relatively
upbeat about the recession easing, leaving investors less
inclined to need the dollar as a safe haven.
That view got an added boost after the Conference Board
said its U.S. consumer confidence index rose in May to 54.9
from a upwardly revised 40.8 in April. Economists polled by
Reuters had forecast a reading of 42.0 for the May index.
"It's still a case of good news is bad news for the
dollar," Woolfolk said.
