The U.S. dollar was modestly lower versus most major currencies other than the Japanese yen Tuesday, pressed by light position-squaring and a bounce in equity markets.
Tokyo's Nikkei stock index fell overnight, but European equities were mostly higher and U.S. stock index futures were pointing to a rebound for Wall Street following Monday's sharp losses. See Europe Markets. Read Indications.
Strategists said worries about the financial sector and signs of rising tensions ahead of Thursday's meeting of leaders from the Group of 20 nations would likely limit downside potential for the dollar, which has tended to gain ground on haven-related buying during periods of increased turmoil.
"The upcoming G20 meeting dominates the market discussion, but there is hardly anyone expecting the outcome of the meeting" to provide a positive surprise, wrote strategists at BNP Paribas.
The Times of London reported Tuesday that French President Nicolas Sarkozy could walk out of the Thursday summit if leaders don't heed France's demands for stricter financial regulation. See full story.
The G20 is expected to emphasize a plan to tighten regulations, but France has called for a global financial regulator, an idea opposed by the United States and Britain, the report noted.
The dollar index , a measure of the greenback against a trade-weighted basket of six major currencies, slipped to 85.222, down from 85.712 in late North American trading Monday.
The euro rose to $1.3324, up from $1.3185 late Monday, as the single currency halted a steep slide that saw it dip more than 5% versus the dollar since Thursday.
But worries about the financial sector and the G20 "should allow the U.S. dollar to shine due to its status as safe haven leaving risks in [euro/U.S. dollar] for a test of the $1.30 area in the days to come," wrote strategists at Commerzbank in Frankfurt.
Credit downgrades for Ireland and Hungary are likely to hang over sentiment in the euro zone, they said.
Meanwhile, a sharper-than-expected slowdown in March euro-zone annual inflation to a record low 0.6% underscores expectations the European Central Bank will move to cut rates and signal a potential move toward expanding its range of "unconventional" monetary policy measures when its rate-setting Governing Council meets Thursday. The ECB has an annual inflation target of just below but near 2%.
"With core inflation set to ease further in response to the economic slump, inflation looks set to remain well below target throughout 2010," said Jennifer McKeown, European economist at Capital Economics. "In all, then, nothing here to stop the ECB from cutting interest rates by another 50 basis points on Thursday and perhaps even hinting at a move towards further unconventional policy measures."
The ECB's key lending rate stands at 1.5%.
The British pound rose to $1.4331, up from $1.4251 late Monday.
The dollar rose versus a broadly weaker Japanese currency to trade at 98.39 yen, up from 97.21 yen.
Japanese Prime Minister Taro Aso on Tuesday ordered another stimulus package to boost the nation's economy, news reports said.
The Paribas strategists said Wednesday would provide a key test for the yen as the new fiscal year gets under way.
"Should the Japanese yen continue to weaken tomorrow then the yen outflow will be broad-based and not just related to fiscal year-end valuation pressure," they wrote.
