LONDON (Reuters) - The euro edged higher against the dollar on Tuesday after a debt sale in the Netherlands produced solid results despite the Dutch government's collapse in a crisis over budget cuts the previous day.
Political uncertainty over the growing prospect of a change of leadership in France as well as the Dutch impasse weighed on the single currency. Elsewhere in the euro zone, highly indebted Spain's borrowing costs remained a worry for investors.
The Netherlands, one of the euro zone's few remaining AAA-rated economies, sold 1.995 billion euros of two- and 25-year government bonds, roughly in the middle of its target range, a day after Prime Minister Mark Rutte resigned.
The euro rose 0.2 percent to a session high on Tuesday of $1.3184, paring losses from the previous day when disappointing euro zone PMI data pushed it to a low of $1.3103, and it last traded at $1.3162.
The currency, however, remains in a range roughly between $1.30 and $1.33 which it has kept within since early April. Traders cited talk of bids under $1.3110 and lower at $1.3070, and offers from Middle Eastern investors at $1.3180.
"There has been more chat about the resilience of the euro that's spooking some people out of playing it lower over the short term, but there are some very significant risks ahead," said Derek Halpenny, European head of currency research at Bank of Tokyo-Mitsubishi.
Ratings agency Moody's said the collapse of the Dutch government after failing to agree on austerity cuts was credit-negative, although it maintained the country's triple-A rating . Fellow agency Fitch warned last week it was on the verge of taking negative action on the rating.
Many investors were also concerned about events in France where Socialist Francois Hollande - who has promised to renegotiate a European budget pact - won the first round of France's presidential poll on Sunday.
The second round of the French presidential election is on May 6, the same day that Greece elects a new government, while Ireland faces a referendum on the European Union fiscal compact later in May.
"As we move into May and June we could see further volatility and turmoil which we think will see the euro break below $1.30," Halpenny said.
The U.S. Federal Reserve starts its two-day policy meeting on Tuesday. While the bar has been set high for another round of stimulus, the market will nonetheless be keeping a close eye on policymakers given the still-fragile U.S. economic recovery.
Some analysts attributed the euro's recent resilience against the dollar to a fall in Treasury yields on weaker economic data, which has compressed the spread between the 10-year U.S. government bonds and their German equivalent.
The apparent inability of the common currency to break either side of the range meant more consolidation was possible, they said, although given the return of tension around debt problems few were optimistic about the euro in the longer term.
"We expect euro/dollar to resume a weakening trend in coming weeks, with a break of $1.30 opening up a trading target of $1.25 within a 2-3 month horizon," said Jens Nordvig, global head of FX strategy at Nomura Securities.
The Australian dollar hit a two-week low against the U.S. dollar after soft inflation data fuelled expectations of interest rate cuts by the Reserve Bank of Australia.
The Aussie was down 0.3 percent at US$1.0283. It earlier fell to US$1.0247 on data showing Australian consumer prices climbed less than expected last quarter while underlying inflation posted the smallest rise in a decade.
The safe-haven yen was broadly steady, trading close to flat against the U.S. dollar at 81.14 yen.
Additional reporting by Neal Armstrong; Editing by Stephen Nisbet