By Polya Lesova & William L. Watts, MarketWatch NEW YORK (MarketWatch) -- The dollar fell sharply against the euro and other major currencies Tuesday, as equity markets surged on a further bounce in risk appetite and commodities rallied across the board. The dollar index , a measure of the greenback against a trade-weighted basket of six currencies, fell 1.6% to 84.51, down from 86.350 late Monday. The euro surged 3.4% to $1.3012, up from $1.2641 in North American trade late Monday. Earlier Tuesday, the euro hit an intraday high of $1.3027. "We are in the midst of what looks like a dollar correction lower," wrote currency strategists at Brown Brothers Harriman. "Implied volatility has continued to fall, suggesting the euro could move higher in coming days with market participants likely to look past today's U.S. presidential elections toward what could be horrendous jobs numbers on Friday," they said. The sharp dollar weakness came as commodities, such as oil, gold and copper, rallied. The Reuters/Jefferies CRB Index , a benchmark gauging the prices of major commodities, soared 4.5%. See Futures Movers. The British pound gained 2.2% to $1.6071 after hitting an intraday high of $1.6105. The dollar, however, gained against the yen. The greenback rose 1.2% to 100.45 yen. "As the polls open today, risk aversion continues to ease, causing the dollar and yen to weaken against all other major currencies," said James Hyland, a strategist at Wachovia. The Australian dollar and New Zealand dollar were the biggest gainers Tuesday, even after the Royal Bank of Australia cut interest rates by 0.75 percentage point. Also, the euro and the British pound surged despite expectations that the European Central Bank and the Bank of England will cut interest rates on Thursday. "Typically, when central banks cut interest rates that currency depreciates, but investors' willingness to take more risk seems to be the overriding theme this week," Hyland said in a research note. All eyes Tuesday are on the U.S. presidential election which has pitted Sen. Barack Obama of Illinois, the Democratic presidential nominee, against his Republican challenger, Sen. John McCain of Arizona. Pre-election polls showed Obama holding a strong lead over McCain. Read more. The rise in risk appetite boosted emerging-markets currencies, with the Turkish lira soaring 4% against the dollar and the South African rand gaining 3.5%. See Emerging Markets Report. Stocks rally On Wall Street, U.S. stocks rallied, with the Dow Jones Industrial Average rising 283 points. See Market Snapshot. "For today we would expect the U.S. dollar to consolidate in European trading as markets will most likely wait for the first results of U.S. presidential election," said Marcus Hettinger, currency strategist at Credit Suisse in Zurich. But strategists said the final outcome of the election wasn't likely to be a major driver for currency markets. Strategists at UniCredit MIB noted that the euro failed Monday to hold gains above $1.30, "confirming its intrinsic fragility." Hettinger said attention is likely to turn back to the "synchronized" global-growth slowdown in coming weeks, which will likely underpin currencies from countries with current-account surpluses, such as the Japanese yen and the Swiss franc. Australia rate cut The Reserve Bank of Australia cut its cash rate by three-quarters of a percentage point Tuesday to 5.25%, exceeding expectations for a half-point cut. See full story. The yen gained immediately after the move, boosted by expectations that other central banks will also cut sharply and reduce the attractiveness of carry trades, said Alastair Chan, a Sydney-based economist with Moody's Economy.com. The Australian dollar was up 2.4% against the U.S. dollar in recent action at 69 U.S. cents. The Aussie also turned higher against the Japanese unit, rising 2.9% to 68.97 yen.

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