By Deborah Levine

The dollar advanced on Wednesday against the euro, which fell below $1.22 late in the session, in part as a jump in U.S. durable goods orders and new home sales added fundamental support for the greenback, which is on track for its best month since October 2008.

"The positive mojo continues today with numerous affirming stories for the shift including stronger-than-expected U.S. durable goods orders," said Andrew Busch, global currency strategist at BMO Capital Markets. "Risk aversion is still near and dear to the markets, but the panic appears to have reached an apex yesterday."

The dollar index (DXY), which tracks the U.S. unit against a basket of six major currencies, rose to 87.159, up from 86.799 in late North American trading on Tuesday.

The index is up from 81.866 on April 30, on pace for its sixth monthly gain.

The euro (CUR_EURUSD) fell to $1.21.97, down from $1.2308 late Tuesday. It touched a four-year low near $1.2144 on May 19. The shared currency is on track for its biggest monthly drop since January.

A break below some key areas, namely $1.2180 to $1.2130, could signal another round of selling pressure on the euro, according to IG Markets,

Against the Japanese currency, the dollar (CUR_USDYEN) fell to buy  ¥90.01, compared with  ¥90.13 late Tuesday.

The euro declined to  ¥109.74 (CUR_EURYEN) from around  ¥111.14 late Tuesday. The yen tends to benefit when investors want a safer, albeit lower-yielding, currency. In May, the dollar has slipped from  ¥94.01, likely to be the biggest slide since November.

"As the markets have seemed to calm down temporarily, some of the safe haven attraction of the yen has dissipated and the dollar has made some slight gains," said Dan Cook, senior market analyst at IG Markets.

The euro also extended its decline, taking U.S. stocks with it, apparently reacting to media reports that China is reviewing its holdings of European bonds, according to Brown Brothers Harriman.

The Commerce Department said orders for durable goods in April rose 2.9%, beating forecasts of economists surveyed by MarketWatch.

A separate report also came in stronger than predicting, showing new-home sales in the U.S. jumped 14.8% in April to a 504,000 pace.

"The dollar's move higher versus the euro is interesting in that even with firmer equities and risk backdrop, the single currency has failed to benefit, which suggests the euro sentiment remains sour," said analyst at Action Economics.

Even before this month's volatile market gyrations, stemming from worries about Greece's ability to meet its debt obligations and slash its deficit, currency strategists had said the dollar was likely to benefit either from safe-haven buying or better U.S. data.

Either would underline that the U.S. and its economy were further along in a recovery than Europe, making the Federal Reserve more likely to be able to raise interest rates sooner than the European Central Bank -- even if that first hike is far off, as many still believe.

Also pointing to stronger growth globally, the Organization for Economic Cooperation and Development said the industrial world's economy is recovering at a faster-than-expected pace but faces growing danger from woes over sovereign debt as well as the prospect of emerging economies overheating.

The Paris-based organization now expects gross domestic product across member countries to grow by 2.7% this year and by 2.8% in 2011.

Auctions, Korea

Meanwhile, an auction of German notes failed to attract full demand, as historically low yields in the wake of safe-haven flows into German debt amid the euro zone's crisis over sovereign debt left the notes expensive, analysts said.

Auctions elsewhere went somewhat better, with Portugal and Italy attracting moderate demand for their own sales of government debt.

Along with the latest out of Europe, currency traders continue to keep an eye on developments on the Korean peninsula. Risk appetite took a hit Tuesday as tensions rose between South Korea and North Korea, which late Tuesday severed all ties with its neighbor.

"Investors continue to follow the situation closely, but the consensus view is that the worst of the crisis may have passed avoiding military action which was a welcome sign of relief for global capital markets," said Boris Schlossberg, director of currency research at GFT.

Currency ETF returns

Among the more popular exchange-traded funds, PowerShares DB US Dollar Bearish Fund (UDN) has lost 6.8% in May while PowerShares DB US Dollar Bullish Fund (UUP) has returned 6.3%.

CurrencyShares Euro Trust (FXE) has fallen 8.4% this month.

CurrencyShares Japanese Yen Trust (FXY) is up 4.2% so far in May.