The U.S. dollar lost ground against most major counterparts Tuesday, pressured by profit taking after surging the previous day on a wave of safe-haven buying as world equity markets plummeted to their lowest levels of the financial crisis.
"What we have for now could well end up being a temporary lull before the pace picks up again," said James Hughes, market strategist at CMC Markets.
"But one point that yesterday's broad-based sell-off in benefit of the dollar does make is that the currency continues to hang onto its favored status despite the rather dubious outlook that's associated with the U.S. economy right now," he said.
Equity indexes were mixed following Monday's plunge. U.S. stock index futures were edging higher, pointing to a bounce for Wall Street off levels not seen since 1996. Read Indications.
The dollar indexwhich measures the currency against a trade-weighted basket of six global counterparts, fell to 88.819 from 88.950 in North American trade late Monday.
Analysts at Standard Chartered said the next key level of technical resistance stands around the March 2006 high of 90.75.
The Australian dollar edged higher after the Reserve Bank of Australia held its key rate steady at 3.25%. The Aussie rose 1.9% versus the U.S. dollar to trade at 64.15 U.S. cents.
The RBA's decision caught the market by surprise, strategists said, amid expectations for a further half-point rate cut.
"Market and mortgage rates are at very low levels by historical standards and business loan rates are below recent averages, reducing debt-servicing burdens considerably," Reserve Bank Governor Glenn Stevens said in a statement.
The Australian central bank has raised interest rates twice and cut them five times in the last 13 months, lowering the benchmark rate a net 3.5 percentage points. Stevens said financial market conditions have improved since November, but sentiment remains weak.
The euro edged up to $1.2600 from $1.2565.
Strategists at BNP Paribas said continued uncertainty over U.S. financial rescue efforts is likely to continue backing for safe-haven flows into the U.S. currency.
Investors are looking for a "continued retreat in risky assets as financial institutions will be forced to deleverage and clean up their balance sheets," they wrote. "As long as risk aversion remains a theme, the U.S. dollar is likely to find support and hence we would use near-term rallies in euro/U.S. dollar to form medium-term short positions," they wrote.
The dollar rebounded versus the Japanese currency to trade at 97.91 yen, up from 97.45 yen late Monday.
The British pound was little changed versus the dollar, trading hands at $1.4028.
British Chancellor of the Exchequer Alistair Darling said the Bank of England could move this month to begin boosting money supply through the purchase of assets, according to an interview with the Daily Telegraph newspaper published Tuesday.
"We've given them the levers," Darling said, in the interview. "They may decide this month that it's appropriate to do so."
The bank's rate-setting Monetary Policy Committee will announce its latest interest rate decision on Thursday. Bank officials, including Governor Mervyn King, have indicated the central bank is prepared to begin using asset purchases in an effort to boost the money supply and stave off the threat of deflation. See full story.
