The U.S. dollar fell against other major currencies on Tuesday, as worries about the severity of the U.S. economic downturn outweighed concerns about the potential for a full-fledged pandemic of the swine flu.
The dollar index , a measure of the greenback against a trade-weighted basket of currencies, fell to 85.47, down from 85.641 in North American trading late Monday.
"Among the majors, the dollar is softening a bit and again the focus is squarely on reduced risk aversion and continued problems with the U.S. economy," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon. "It certainly seems that the swine flu scare appears to be subsiding somewhat. It's not being viewed as the pandemic crisis that some had feared."
The swine-flu virus is suspected in more than 150 deaths in Mexico.
The number of confirmed and suspected cases of swine flu worldwide increased Tuesday, as the World Health Organization raised its alert level, saying containment of the outbreak wasn't feasible. A pandemic isn't inevitable, but the risk of one has increased, the WHO said. See full story.
The dollar fell 0.2% to 96.56 Japanese yen, while the euro rose 0.4% against the greenback to $1.3067.
The British pound also gained 0.5% to $1.4682.
"There's some risk leading to tomorrow's Fed decision and the GDP number," Woolfolk said. "Expectations are for the Fed to announce further quantitative easing measures and also for a very negative GDP report for the fist quarter."
Most analysts expect the first-quarter U.S. GDP report on Wednesday to show a contraction of 5%. The Federal Reserve will announce tomorrow its decision on monetary policy.
Swine flu worries
Earlier Tuesday, the dollar had extended yesterday's gains, as currency investors sought a safe haven for their money amid rising swine flu worries.
"While the swine flu outbreak could have been used as an excuse for investors to unwind positions yesterday, we expect the outbreak to have a temporary impact on the market," said strategists at BNP Paribas in a note to clients.
"Although the WHO has raised its alert to level four (indicating the virus' human-to-human transmission capability), the availability of Tamiflu to control the spread of the virus should mitigate the global economic impact," they said.
There is no evidence that the outbreak of swine flu has proven fatal outside of Mexico. The number of confirmed U.S. cases doubled to 40.
Worldwide, there were more than 70 confirmed cases, including six in Canada, one in Spain and two in Scotland, according to the Associated Press.
Israel on Tuesday confirmed its first case of swine flu, saying tests showed a man who recently returned from Mexico had contracted the virus, the BBC reported.
Jessica Hoversen, currency strategist at MF Global Research in Chicago, noted that currency trading is likely to be very volatile.
"The swine flu outbreak has the globe up in arms, making this very reactionary market even more edgy and vulnerable to event risk," Hoversen said in a research note.
"The flu not only raises health concerns but additionally heightens fears about the fragile global economy," she wrote.
The Mexican peso, which plunged on Monday, rebounded slightly against the dollar. One dollar bought 13.905 pesos, a decline of 0.8% for the greenback.
"For Mexico, this [swine flu] is one more in the list of negatives for the economy, including the sharp slowing in U.S. growth, the downsizing of the U.S. auto industry, and concerns over drug-related violence," wrote Douglas Smith, an economist at Standard Chartered Bank, in a note.
Jitters over the banking sector are also contributing to investors' aversion to risk, analysts said.
Markets worldwide were affected Tuesday by a Wall Street Journal report that Bank of America and Citigroup had been told to raise more capital based on early results of the government's "stress tests" of 19 large U.S. institutions.
MF Global's Hoversen said shifts in perceptions about the banking industry, which had tended to drive action in currency markets in recent weeks, could remain overshadowed by headlines surrounding the global flu threat.
"The stress tests are still lingering in investors' minds. However given the recent news, the risk appetite that may have been catalyzed by a clean report from the banks may now be damped by the ongoing fears of the virus," she said.
