NEW YORK (Reuters) - The dollar fell against the euro and sterling on Wednesday as U.S. stocks stabilized and big buy orders for the European currencies pushed them through key technical levels.
A U.S. economic report showing a record slide in consumer prices last month also added to pressure on the dollar as it suggested the Federal Reserve may have to cut benchmark interest rates from an already low 1 percent.
Analysts, however, said investors remained skittish about the health of the world economy and were likely to take future cues from Wall Street's next move higher or lower.
"We saw euro and the sterling break through key trend lines and momentum traders jumped in and followed the moves to push them higher," said Brian Dolan, head of research at Forex.com in Bedminster, New Jersey.
"But I think this is a false break because we're likely to see stocks relapse into negative territory, as there's no reason for them to rally in this environment."
Mid-morning, the euro was up 1.3 percent at $1.2780 after earlier hitting a session peak of $1.2801. It rose 0.9 percent to 123.79 yen.
Sterling added 1.5 percent to $1.5200 after breaking above the $1.51 area, which Dolan said was a key trend line in a steady decline that began when it traded around $1.66.
Traders shrugged off minutes from this month's Bank of England policy meeting that showed policymakers unanimously agreed to cut interest rates by 150 basis points and even discussed a bigger cut.
Analysts said investors were still wary of taking on too much risk, as evidenced by the dollar's 0.2 percent slide to 96.80 yen.
The yen rises along with risk aversion because investors unwind trades in higher-yielding assets and currencies that had been financed with cheaply borrowed yen.
Also of particular concern was the fate of the struggling U.S. auto industry, which some investors fear may fail to win emergency government loans.
Michael Woolfolk, senior currency strategist at The Bank of New York-Mellon, said bankruptcy for General Motors, Ford or Chrysler "could prove to be the next Lehman Brothers because of the systematic risk their failure would create."
Markets tumbled in September when U.S. investment bank Lehman Brothers failed.
"Equities moved dramatically lower in October and the dollar and yen rallied, and most people still fear moves in that direction will reassert themselves," said David Watt, currency strategist at RBC Capital Markets in Toronto.
Economic data on Wednesday showed U.S. consumer prices plunged 1 percent in October, while core prices that remove food and energy costs fell 0.1 percent.
Kathy Lien, head of currency research at GFT Forex in New York, said "less price pressure will give the Federal Reserve more room to cut interest rates," adding she expects the federal funds rate to drop to 0.5 percent from its current 1 percent next month.
(Additional reporting by Vivianne Rodrigues in New York and
