NEW YORK (MarketWatch) — The U.S. dollar rose to its strongest level against the euro since late September on Monday as investors increasingly speculated that Ireland may soon take some sort of financial assistance.

Also supporting the greenback, U.S. bond yields have risen in recent weeks, making Treasury debt more attractive. The dollar extended gains late Monday after yields jumped following reports regarding Moody’s Investors Service’s U.S. rating. Read about Treasury bond yields, Moody’s.

The U.S. dollar index DXY, -0.03% , which measures the greenback against a basket of six major currencies, climbed to 78.652 from 78.106 late Friday. It touched 78.665, the highest level seen since early October. See more tools and data on currencies trading.

The euro EURUSD, +0.15% traded at $1.3579, down from $1.3696 in late North American trading Friday. It fell as low as $1.3570, just a hair above its weakest level since late September, touched Friday.

Against the Japanese yen USDYEN , the dollar is up 1.8% since the Fed meeting. It recently rose to ¥83.16, up from ¥82.49 late Friday.

The British pound GBPUSD, -0.42% slipped 0.4% to $1.6053.

“As the sovereign bond markets continue to anticipate a potential Irish bailout ahead of a meeting between finance ministers across Europe tomorrow, the euro continued its broad decline,” said Chris Walker, currency strategist at UBS. “The dollar remained stable as the focus [is] firmly on the European debt woes.”

Dollar wrong-foots the speculators

News reports over the weekend and Monday said Ireland was under pressure from Germany and other European Union counterparts to seek a bailout in order to prevent turmoil from spreading in the financial markets, even though Ireland doesn’t need to return to credit markets until the middle of next year. Read about Ireland.

The banter comes before a major meeting of European finance ministers on Tuesday. A European Commission spokesman in Brussels said reports of Ireland facing pressure to accept a bailout amounted to exaggerations and reiterated that Dublin hasn’t requested external aid.

The bigger problem, analysts said, is that even if Ireland accepts a bailout, investors’ attention will just focus instead on other countries with oversized debts or banking-sector problems, including Portugal and Spain.

“Financial stability concerns in Ireland and potential contagion to periphery Europe are likely to require the use of a financial backstop soon,” said Aroop Chaterjee, currency strategist at Barclays Capital. “While the market may be temporarily calmed by an Irish announcement, we do not expect peripheral concerns to disappear quickly and continue to see this as keeping the euro weak over the medium term.”

Also Monday, the European Union statistics agency revised higher its forecast of Greece’s government deficit, to 15.4% of gross domestic product from an earlier estimate of 13.6%.

Greece, in turn, boosted its forecast of its 2010 deficit to 9.4% of GDP — an improvement that would nonetheless underscore the challenges the country faces in getting its books in order, analysts said. Read more about Greece.

Easing in U.S., Japan

Because of the problems in Europe, the dollar index has managed to gain about 2.5% since the Federal Reserve announced earlier this month that it would embark on a second-round of quantitative easing — also known in financial circles as QE2.

Bond strategists said traders overbought Treasurys ahead of the announcement, which explains the selloff in the last several weeks. Bond prices move in the opposite direction as yields.

“If U.S. yields continue to rise, they will drag the U.S. dollar higher with them,” said Greg Anderson, senior foreign-exchange strategist at Citigroup. “However, it is important to note that the Fed’s QE2 purchases barely began last Friday.

“It will undoubtedly take time for those purchases to have an impact on yields, but to the extent they do, today’s dollar strength will be undermined.”

Trading in the dollar also played off a pair of U.S. economic reports showing that manufacturing activity in the New York region weakened this month and that the nation’s retail sales were strong in October. See story on Empire survey.Read about retail sales.