MW: Dollar gains as recovery prospects cool; Fed on deck
British pound gains on U.K. proposed deficit-slashing budget
By Deborah Levine and Laura Mandaro , MarketWatch
NEW YORK (MarketWatch) -- The dollar pared gains against the euro but still rebounded Tuesday from the prior session's losses, as a downgrade of a major French bank resurrected worries about the European economic outlook and as enthusiasm over China's currency strategy faded.
The euro (CUR_EURUSD bought $1.2280, down from $1.2318 in late North American trading Monday.
The dollar index (DXY 85.81, -0.12, -0.14%) , which tracks the U.S. unit against six major counterparts, traded at 86.019, compared with 86.023 on Monday.
Cutting into the index's gains, the British pound turned higher after Chancellor George Osborne's U.K. emergency budget proposed 40 billion pounds ($59 billion) in spending cuts and tax increases a year by 2015. Read about British budget.
The pound rose to $1.4796, up from a low of $1.4686 in earlier trading and up about 0.2% from Monday.
The budget reduced the uncertainty surrounding the pound, prompting the gains, according to Barclays Capital strategist Paul Robinson.
"There can be little doubt that the fiscal deficit has weighed on the pound over recent months, and this budget did come across as being a fairly confident and upfront way of tackling the issues it raises," he said.
Against the Japanese yen, the dollar (CUR_USDYEN ) fell to ¥90.62, from ¥91.97 late Monday.
Setting the tone in early action, Fitch Ratings late Monday downgraded BNP Paribas' (BNPQY 30.35, -0.37, -1.20%) issuer default rating, to AA- from AA previously, citing high exposure to corporate and investment banking, a decline in asset quality, and capital levels deemed as slightly below-average. See more on European bank stocks.
"Talk that Fitch sees the risk of a [double-dip recession] in Europe as having become more likely has also weighed on sentiment," wrote Jane Foley, research director for Forex.com, in emailed comments.
Fitch rates the risk of the euro zone breaking up as low, but it also believes the region is likely to experience more episodes of "extreme market volatility," until deficits are reduced and a recovery is in place, according to a report published late Monday on the Web site of the U.K. Telegraph.
Currency markets shrugged off a fairly upbeat report on German business sentiment. The Ifo index measuring the German business climate for industry and trade rose to 101.8 in June from an unchanged reading of 101.5 in May. Read about German Ifo survey.
The main piece of U.S. economic news during the session was also unexpectedly weak, weighing ion investor willingness to move towards currencies considered riskier than the dollar.
Existing-home sales for May fell 2.2% to a 5.66 million pace, the National Association of Realtors said. See more on home sales.
"Housing remains a crucially important part of the economy from a sentiment standpoint, said Dan Greenhaus, chief economic strategist at Miller Tabak. "As housing weakens, will consumers continually feel exuberant about their respective financial situations? We think not."
