MW: Greenback weaker as stocks gain after ISM report
Australian dollar up 2% after central bank leaves policy rate unchanged
By Deborah Levine and William L. Watts, MarketWatch
NEW YORK (MarketWatch) -- The dollar fell to a two-month low on Tuesday as U.S. stocks followed global equity markets higher, while the Australian dollar jumped in the wake of an upbeat policy statement from the Reserve Bank of Australia.
Stocks gained even after a report showed the U.S. services sector slowed last month, underlining weaker growth prospects for the world's largest economy.
The dollar index (DXY 83.90, -0.71, -0.83%) , a measure tracking the performance of the greenback against a basket of six major currencies, fell to 83.989, down 0.8% from light trading on Monday to the lowest level since early May. That compares with 84.410 in late North American trading on Friday.
U.S. markets were closed Monday for Independence Day.
The euro (CUR_EURUSD 1.2641, +0.0104, +0.8295%) rose to $1.2621 from $1.2525 in late trade Monday. It's near its highest levels since early May.
The British pound (CUR_GBPUSD 1.5210, +0.0076, +0.5022%) reached $1.5220, touching the best level against the dollar in two months and up from $1.5124 late Monday.
Against Japan's yen, the dollar (CUR_USDYEN 87.4400, -0.3100, -0.3533%) gave up most of its earlier gains to buy ¥87.58, little changed from Monday. Last week, the dollar touched the lowest level versus the yen since December.
"An overnight upbeat assessment of the Australian economy by the Reserve Bank of Australia saw risk appetite creep slowly back on to the table," said strategists at Interactive Brokers.
The S&P 500 Index (SPX 1,038, +15.68, +1.53%) gained 1.6% in midmorning trading.
The movements indicate currency traders are again responding more to indications of willingness to buy riskier assets than directly to economic data. More appetite for risk, including stocks and commodities, tends to weigh on the dollar and yen and to benefit currencies including the pound and euro.
"The market is paying increased attention to economic releases at this point in the crisis, and we also appear to have moved into a market psychology where poor U.S. data trigger U.S. dollar weakness," wrote strategists at Brown Brothers Harriman.
Earlier in the year, such data would have fueled flight-to-quality trading into the greenback, they noted.
The Institute for Supply Management's index on the non-manufacturing sector of the U.S. economy fell to 53.8 in June from 55.4 in May. Read about ISM.
All the same, the U.S. economy remains on track to outperform the euro zone this year, according to Brown Brothers.
Meanwhile, remarks Monday by Olli Rehn, the European commissioner for economic and monetary affairs, provided modest support for the euro, said strategists at BNP Paribas.
Rehn told the European Parliament that the European banks' "stress tests," due to be released later this month, will take into account exposure to sovereign bonds, according to Reuters.
Although that will heighten the level of stress for banks heavily exposed to peripheral euro-zone debt, it will increase transparency within the financial sector, which BNP called the "single most important precondition" for the normalization of money markets.
But Jane Foley, research director at Forex.com, said anxiety about the stress tests will remain high, while the results are likely to be a "thorn in the side" of the euro.
Australian rates
Meanwhile, the Australian dollar (CUR_AUDUSD 0.8541, +0.0145, +1.7272%) bought 85.50 U.S. cents, up 2.3%.
The Reserve Bank of Australia kept its policy rate unchanged at 4.5% on Tuesday, as many analysts expected. The central bank's policy statement indicated further rate increases are to come even as it flagged concerns over the inflation outlook and uncertainties over growth in China and elsewhere. See more on Australian policy meeting.
Barclays Capital expects the central bank to raise rates another 0.75% this year, supporting the currency, which has lost 6.7% this year.
The Aussie dollar "recovered from its earlier Asian session lows, rallying to retake the 84.00 figure on the back of better risk-appetite flows and the relatively upbeat RBA statement," said Boris Schlossberg, director of currency research at GFT.
Demand out of China "will still remain the most important driver of Australian monetary policy going forward," he said in a note to clients. "If Chinese growth begins to cool markedly over the next several months, the RBA is likely to err on the side of caution even if inflationary pressures persist."
