The US dollar fell against a basket of currencies on Tuesday, pressured by position adjustments ahead of the year-end and its diminishing yield appeal. Sterling continued its downtrend, hitting a 6-1/2-year low against the dollar and approaching parity versus the euro as investors braced for the Bank of England to cut interest rates further to support its struggling economy.
With many players winding up for the New Year's holiday, currency trading has been mainly driven by technical factors rather than fundamentals, while thin market conditions have added to volatility, analysts said. "The factors that are really at play right now are less about the fundamentals and more about the calendar year-end (order flows)," said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto.
"What's driving it right now happens to be a bid for (the) euro - euro/sterling and euro/yen. It's a bid to the euro ... which is creating a series of other directional biases which are by and large unfriendly to the US dollar."
The contrast between an aggressive Federal Reserve monetary easing campaign that has brought benchmark rates to near zero and the European Central Bank's more cautious approach is also lending support to the euro and hurting the dollar, analysts said.
"As a result, we have at the end of the year yield differentials between the two regions that favour the euro." The ICE Futures US dollar index, which tracks the value of the greenback against a basket of six currencies, slipped about 0.7 percent to 80.891.
The euro rose 0.7 percent to $1.4076. Against the yen, the dollar slipped 0.3 percent to 90.25 yen. Investors largely shrugged off a slew of economic data that pointed to a deepening recession in the United States. Prices of single-family homes in October plunged a record 18 percent from a year earlier, while consumer confidence fell to a record low in December.
"At this point we are not going to be seeing anything fundamentally positive from the US for the time being," said Michael Woolfolk, senior currency strategist at The Bank of New York Mellon in New York. However, "fundamental factors, though important, have become overshadowed by more technical factors amidst exceptionally thin market conditions."
In other currencies, sterling fell as low as $1.4385, its weakest level since early 2002, according to Reuters data. It was last down 0.4 percent at $1.4427. The euro rose to a record high of 98.05 pence, according to Reuters dealing, approaching parity with sterling for the first time since its launch in 1999.
"The general consensus is not if, it's just when," said Gareth Sylvester, senior currency Strategist at HiFX in San Francisco, of the euro/sterling reaching parity. "The underlying fundamentals in the UK are extremely weak."
Demand for the Swiss franc rose since Monday after the Israeli attacks on Gaza triggered safe-haven demand for the Swiss currency and gold. The dollar was last 0.2 percent lower at 1.0573 Swiss francs, after trading as low as 1.0367 francs on Monday, its weakest level since late July.
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