* Scramble to safety benefits dollar
* Markets already on edge because of Ireland
* Euro lower as euro zone debt problems in focus
(adds quote, updates prices, details)
By Anirban Nag
LONDON, Nov 23 (Reuters) - The dollar rose on Tuesday after North Korea shelled a South Korean island, adding geopolitical tension to Europe's debt crisis and driving investors to the relative safety of the U.S. currency.
The euro fell towards session lows after German finance minister Wolfgang Schaeuble said the single currency is at stake due to the Irish debt crisis, although it then stabilised. [nBAT005786]
The shelling by North Korea triggered return fire by the South, military and South Korean media reported, exacerbating the risk aversion gripping global financial markets heading into the end of the year. [ID:nL3E6MN09Z].
"Tension in the region has led to knee-jerk reaction in currencies and stocks but they tend not to have an everlasting impact," said Paul Robson, currency strategist at RBS Global Banking.
"Focus will shift back to the euro and we believe euro zone peripheral issues have some more time to run. Investors will go after Portugal and then Spain after Ireland is done."
Trading was choppy with a holiday in Japan reducing liquidity. These conditions were seen prevailing this week with the U.S. Thanksgiving holiday looming.
The dollar index .DXY was up 0.2 percent at 78.835, but off its intra-day high of 79.116. The euro was down 0.3 percent on the day at $1.3580 EUR=, falling to below $1.3550 from around $1.3600 when the Korean clash was reported.
The dollar was up 0.1 percent against the yen at 83.40 yen JPY=, having risen to as high as 83.85 yen. Traders said macro funds buying the dollar after the shelling began ran into robust offers from Japanese exporters.
Traders said lower U.S. yields prompted some real money accounts to sell the dollar in the European session.
In the U.S., the minutes from the Federal Reserve's last board meeting on Nov 2 will be released. Political criticism of the Fed's decision to launch QE2 intensified last week, which will leave the focus on the degree of consensus on the decision and any clues on how flexible the Fed will be the programme.
"The main thing from the FOMC minutes will be how much support for QE2 was there at the meeting," said Geoffrey Yu, currency strategist at UBS.
CONFIDENCE IN EURO BRITTLE
Many investors are not convinced aid to Ireland will prevent other heavily-indebted members of the 16-country bloc from seeking aid.
Indeed, Canada's finance minister said on Monday he was pressing the European Union to address the Portuguese debt crisis quickly, although he fell short of saying the country would need a bailout like Ireland. [ID:nN22292493]
Portugal and Spain are seen as the next weakest links and an official from Portugal's main opposition party said it would allow passage of the minority Socialist government's 2011 budget in the final vote on Nov. 26. [ID:nLSB001015] A Spanish tender showed its short-term cost of borrowing almost doubling.
Irish Prime Minister Brian Cowen defied pressure to quit, saying on Monday he would stay in office until parliament passed a budget on Dec. 7, then call an election. [ID:nLDE6AL2AG]
Ireland requests international bailout [ID:nLDE6AK0G8]
Europe debt problems [ID:nLDE68T0MG]
Euro zone debt struggle: r.reuters.com/hyb65p
Multimedia on euro zone crisis: r.reuters.com/hus75h
The euro has already lost 5 percent against the greenback this month, retreating from a nine-month high hit on Nov. 4.
Support for the euro is seen at $1.3446, the Nov. 16 trough, a break of which could pave the way for a retest of $1.3333, the August high, which some analysts said would confirm a developing downtrend for the single currency.
The euro was lower at 113.20 yen EURJPY=R, well below Monday's highs of 114.98 yen.
Both the Australian and the New Zealand dollar shed ground as the tension on the Korean peninsula prompted investors to unwind some long positions built in those high-yielding currencies.
The Australian dollar AUD=D4 was down nearly 0.7 percent at $0.9820 while the kiwi NZD=D4 fell to $0.7652, its lowest since Nov. 17.
(Editing by Patrick Graham)