The U.S. dollar fell versus some of its major counterparts Tuesday as equity markets pointed higher, indicating more willingness among investors to buy riskier, higher-yielding assets.
The dollar, and to a greater degree, the Japanese yen, have benefited from recent equity losses and mounting worries over the global economic outlook as investors sought safer, lower-yielding currencies.
The dollar index, which measures the U.S. unit against a basket of six major currencies, was slightly lower at 85.418 after trading at 86.149 in North American trade late Monday.
The euro fetched $1.2950, climbing from $1.2807 versus the dollar.
"The ebb and flow of risk appetite will remain the main driver of foreign exchange" rates, said Adam Cole,
global head or foreign exchange strategy at RBC Capital Markets.
The Dow Jones Industrial Average rose 0.5% to 7,981 as a few companies, including drug maker Merck & Co. ) and homebuilder D.R. Horton Inc. , offered earnings that topped market expectations.
The euro was little fazed by data showing producer prices across the euro zone saw fifth consecutive monthly fall in December, bringing the annualized pace down to 1.8% from 3.3% in November.
The European Central Bank meets Thursday, and many analysts expect policy makers to keep the region's key lending rate at 2%, citing remarks by ECB President Jean-Claude Trichet in the wake of last month's rate cut.
The British pound edged up to $1.4249 versus the dollar. That's up from $1.4218 on Monday, when sterling came under heavy pressure following rating agency Moody's decision to cut the credit rating of Barclays .
The Bank of England's rate-setting Monetary Policy Committee is expected to further cut key interest rates Thursday, after slashing the benchmark to an all-time low of 1.5% in January.
Aussie dollar climbs
The Australian dollar jumped versus the U.S. unit after the nation's central bank cut interest rates to their lowest level since 1964 and the Australian government said it planned A$41.5 billion ($26.5 billion) in additional stimulus spending over the next three years.
The Reserve Bank of Australia cut its key lending rate by a full percentage point to 3.25%, citing moderate inflation pressures and the need to head off recession. See full story.
The Aussie rose 1.9% versus the greenback to change hands at 64.27 U.S. cents.
But strategists at BNP Paribas said the Australian unit may be in for more pressure.
"While the RBA's expansionary policy will provide a buffer to the domestic pressures, RBA policy can do little to help the export market," they said, in a research note.
"Hence, risks to growth remain skewed to the downside and the [Australian dollar] has yet to see a bottom."
Meanwhile, the Bank of Japan on Tuesday said it will resume buying shares held by financial institutions, with plans to spend up to 1 trillion yen ($11.5 billion) through April 2010.
The dollar bought 89.22 yen, compared with 89.34 yen late Monday.
