The U.S. dollar turned lower Tuesday, losing support as world equity markets rebounded from recent losses.
Appetite for risk continues to call the tune in currency markets. Bad economic news and rising anxiety about the financial sector have usually served to buoy the dollar in recent months by spurring repatriation and haven flows into the greenback.
A firmer tone in Asian equity markets other than Tokyo's Nikkei 225 Average marked a modest return of risk appetite, however, contributing to a weaker demand for the U.S. currency."In the absence of any key euro-zone (or) U.S. data, the direction in equities -- based on risk perception -- will largely guide the intra-day moves," wrote strategists at Commerzbank in Frankfurt.
The euro rose to $1.2679 versus the dollar, up from $1.2602 in North American trade late Monday.
The euro has seen choppy trading in recent days, though analysts said the ability to hold support near the $1.2600 level appeared bullish at least for the short term.
"Fundamentally, the euro remains weighed down by a combination of macroeconomic and banking concerns that predominate within the euro zone," wrote strategists at Standard Chartered. "In addition, euro-zone banks are thought to have significant exposure to emerging Europe, adding to such concerns."
The dollar index which measures the currency against a trade-weighted basket of six global counterparts, slipped to 88.519 from 89.177. The slide by U.S. equity indexes to lows unseen since the mid-1990s pushed the dollar index last week to its highest level in nearly three years.
The dollar also retreated versus the Japanese yen, sinking to 98.38 yen from 98.79 yen late Monday. Broad dollar weakness offset a fall in the Nikkei 225 Average to a fresh 26-year low.
The yen has been undercut in recent weeks, with Japan beginning to run trade deficits and Japanese institutional investors moving money abroad once more, the Standard Chartered strategists said. "However, Japan still runs a current account surplus and the yen still receives some support at the margin from investor risk aversion."
The British pound also rebounded versus the dollar to trade at $1.3821, rebounding from a plunge that left it at $1.3779 in late North American trade Monday.
Sterling has come under pressure following the Bank of England's decision announcement last week it would move to purchase 75 billion pounds ($106 billion) of government bonds, or gilts, and other assets in a bid to pump up the money supply and avert a deflationary spiral.
The euro continued to rise versus the pound, and was up 0.4% at 91.84 pence in recent action. Read about the BOE's quantitative easing plan.
A weak round of economic data Tuesday morning won't help sterling sentiment, the Lloyds TSB strategists said.
January industrial production shrank by 2.6%, leaving it at a level 11.4% below that seen in January 2008, the Office for National Statistics reported. The more narrow measure of manufacturing production fell 2.9% in January for a 12.8% year-on-year decline.
"Today's ugly report suggests that firms are still cutting back their production massively and [the first quarter] is likely to be as weak as" the fourth quarter of 2008, said Chiara Corsa, an economist at UniCredit MIB.
British same-store retail sales value fell 1.8% last month from levels seen in February 2008, the British Retail Consortium reported Tuesday. The trade group said the figures showed that a January rebound was largely just a "discount-driven blip." See full story.
The value of total sales, which include activity at all stores, rose just 0.1%, the trade group said. The February figures follow a 1.1% jump in year-on-year same-store activity in January and a 3.2% annual rise in total sales.
