By Deborah Levine & William L. Watts, MarketWatch NEW YORK (MarketWatch) -- The dollar pared a gain versus the euro but held some gains versus other major currencies on Tuesday after a closely-watched gauge of German business sentiment registered a stronger-than-expected increase, boosting optimism that the continent's economy is recovering. Still, the U.S. dollar held onto early gains versus commodity-based currencies after China's banking regulator warned the nation's lenders to strictly comply with capital requirements or face sanctions, raising concerns that the months of rapid loan increases will end and slow growth in China, which has been viewed as the spark plug for the global growth rebound. Also, the dollar declined against the low-yielding Japanese yen, indicating a weakening of the greenback's inverse relationship with investors' willingness to move into riskier assets. Because of their low interest rates, both the yen and dollar have been used as the funding currency for investors to buy higher-yielding assets, including stocks and currencies of higher-yielding commodity-based countries, most prominently Australia and New Zealand. The dollar fell to 88.51 yen, down from 89.07 yen in late North American trading Monday. The euro traded at $1.4965, paring an earlier rise and compared to $1.4999 on Monday. The dollar index (DXY 75.19, +0.11, +0.15%) , a measure of the U.S. unit against a basket of major rivals, traded at 75.105, edging down from 75.129 late Monday. The dollar extended losses versus the Japanese yen and fell towards the lowest levels of the trading session versus the euro after a U.S. government report showed the economy grew at a 2.8% pace in the third quarter, slower than previously reported but in line with economists' expectations. See more on U.S. GDP. The dollar continued to lose ground against the Japanese currency "with the yen refusing to cede ground against the dollar after as the initial bout of risk aversion appeared to subside," said Andrew Wilkinson, senior market analyst at Interactive Brokers. "It very much confirms that the dollar's loss of status is set to continue." Also the S&P/Case-Shiller home price index showed U.S. home prices rose more slowly in September. Still to come are data on U.S. consumer confidence and the minutes from the Federal Reserve's Open Market Committee's policy meeting earlier this month. "The rhetoric in the wake of the latest meeting was more dovish than that following the September meeting," said T.J. Marta, chief market strategist at Marta on the Markets. Also of interest will be any discussion of extending the mortgage-security purchase program beyond its expected end date in March, something James Bullard, president of the Federal Reserve Bank of St. Louis, alluded to over the weekend. The FOMC minutes are scheduled to be released at 2 p.m. Eastern time. Helping the euro recover from an earlier decline versus the greenback, the German Ifo Institute's November business-climate index gained more than predicted. See story about the November Ifo reading. "The strong rebound in Ifo expectations signals that the sharp increase in German industrial production will continue," said Frank Oland Hansen, senior economist at Danske Bank in Copenhagen. "We anticipate that the German rebound will continue at full speed in the coming months driven in tandem by the inventory cycle and exports." Still, equity markets remained mixed, with U.S. benchmark indexes opening with small losses. That supported the U.S. dollar's gains versus its Australian and New Zealand counterparts. The Australian dollar fell 0.5% to 92.03 U.S cents. The U.S. unit also rose 0.7% on the New Zealand dollar to NZ$1.3755.

Source