NEW YORK (CNN/Money) - The euro retained its edge on the U.S. dollar Tuesday, hovering just above parity and holding on to previous gains.

The dollar also dropped against the yen, hitting its weakest level since February 2001 and raising market nervousness that Japanese authorities might once again step in to sell yen.

Meanwhile, U.S. Treasurys gave ground following comments by Federal Reserve Chairman Alan Greenspan in testimony on Capitol Hill suggesting that the U.S. economy required no further action from the Fed at present.

From the point of view of the European Commission, the euro's rise against the dollar is positive on balance and boosts expectations the euro-zone economy will grow in the second half thanks to rising domestic demand.

"A strong euro is in the interest of the euro area, notably due to its positive effect in keeping inflation under control and underpinning domestic demand," European Commission monetary and economic affairs spokesman Gerassimos Thomas said Tuesday.

The euro bought $1.0081, up from $1.00 even late Monday, and the dollar purchased ¥116.05, down from ¥116.23 late Monday. The euro rose past parity with the dollar Monday for the first time since February 2000.

"The overall mood is quite bearish and sentiment is definitely negative for the dollar. A decline in stock markets is directly affecting U.S. consumer confidence," said Stacey Seltzer, currency strategist at Brown Brothers Harriman.

Partly due to that sentiment, a growing number of economists believe the Fed will keep rates unchanged through the rest of the year. Low interest might motivate consumers to keep spending and businesses to invest, forces that would bolster economic growth.

Consumers, whose spending accounts for two-thirds of all economic activity, have been maintaining a healthy level of spending despite the spotty recovery and the sour stock market, Greenspan said.

U.S. Treasury Secretary Paul O'Neill said the United States remains committed to its policy of supporting a strong dollar.

O'Neill, speaking at Osh State University in Kyrgyzstan, said that despite the dollar's slide in value against the euro, the euro had regained only about half its value since its launch at the start of 1999 and asserted that there is no change in U.S. strong-dollar policy

"There is no change in policy. Strong dollar policy. The same old wonderful stuff." O'Neill said.

U.S. Treasurys fell sharply Tuesday after Greenspan offered a relatively upbeat outlook on the economy and signaled that the central bank was not considering cutting interest rates again.

The two-year note fell 6/32 to 100-14/32. Its yield, which moves inversely to the price, rose to 2.64 percent from 2.55 percent Monday. Five-year notes dropped 12/32 to 102-3/32, yielding 3.89 percent, up from 3.80 percent yesterday.

Ten-year notes shed 20/32 to 101-7/32, yielding 4.71 percent against 4.62 percent a day earlier. The 30-year bond tumbled 1-3/32 to 98-25/32 to yield 5.45 percent, up from 5.38 percent Monday.

Speculation had mounted as stocks plunged in recent weeks that the central bank may come to the rescue of markets by cutting rates. While such sentiment was not widespread in debt markets, it had helped Treasury yields rally to eight-month lows, analysts said.

"Greenspan is clearly telling us he's not throwing an interest rate bone to the market," said Richard Gilhooly, senior fixed-income strategist at BNP Paribas. "The best we can take out of this for monetary policy is that rates will stay where they are for a while longer."

Even as Treasurys retreated on Greenspan's positive outlook, interest rate futures indicated little chance the central bank would hike interest rates before the end of the year. Most analysts now look to early 2003 for a shift in the central bank's accommodative monetary policy.

Gilhooly said that this week's major earnings reports would have the biggest impact on the bond market, whose 3-1/2 month rally has been fueled by the steep slide in stocks that has sent the broad market down 20 percent.

Greenspan said the economy had held up "remarkably well" after the shocks of the Sept. 11 attacks and the stock market's two-year slide and that the economy was on the road to a sustained recovery.

The Fed reported that industrial production surged 0.8 percent in June, beating forecasts of a 0.5 percent rise. Capacity utilization rose sharply, to 76.1 percent from 75.6 percent, a positive sign that factories are having to use more resources in boosting production.  

--from staff and wire reports