The dollar slipped against other major currencies apart from the yen on Wednesday as a recovery in global share prices quelled some risk aversion, while the euro gained on improving regional business sentiment.
Rise in European shares helped to prompt investors to cover short positions in currencies including the euro, which fell earlier in the week after concerns about swine flu triggered risk-averse selling.
Also helping the euro was a European Commission survey showing that economic sentiment in the region improved to 67.2 points in April from 64.7 in March, rising more than expectations for a climb to 65.2 points. Markets awaited the release of first quarter growth figures in the United States, as well as a policy decision by the US Federal Reserve later in the day.
Analysts said traders picked up currencies perceived to be higher risk, including the euro, sterling and the Australian and New Zealand dollars, after selling them at the start of the week when concerns about the swine flu outbreak escalated.
"The market was slightly positioned for risk appetite, and when the (swine flu) news came out, it shook out those positions," said Robert Minikin, senior currency strategist at Standard Chartered in London. He added that those positions were being put back on again, particularly after the improvement in eurozone business confidence reinforced the recovery in risk appetite.
"What we saw on Monday and Tuesday should not be seen as more than a transitory dynamic," he said, adding that overall risk demand was continuing to improve.
The euro was up 0.8 percent at $1.3240, near a session high around $1.3246. The single currency recovered after falling as low as around $1.2960 on Tuesday. Gains in the euro helped to push the dollar down 0.6 percent against a basket of currencies to 84.675. A fall under 84.452 would mark its lowest since early April.
Improving risk demand stung the yen, which along with the dollar had rose earlier in the week, when uncertainty about the impact of a spread in swine flu had sparked safe-haven buying in the two currencies, which are considered low-risk. The euro climbed roughly 1.5 percent to 128.57 yen, pulling back from a six-week low below 124.40 yen on Tuesday. The dollar rose 0.3 percent at 96.64 yen.
Higher-yielding currencies were also up, with the Australian and New Zealand dollars each climbing more than 2 percent against the yen. Markets await first-quarter US gross domestic product figures to be released at 1230 GMT. Economists forecast an annualised contraction of 4.9 percent, but estimates range as deep as an 8.0 percent drop.
The data follows stronger-than-expected US economic data on consumer confidence and home prices, as well as positive corporate earnings results, which supported tentative hopes the economy may be stabilising and improved risk sentiment. The Fed ends a two-day meeting on Wednesday and as rates are already near zero, markets will be looking for any extension of quantitative easing and will focus on the central bank's economic outlook amid signs that a downturn is easing. A statement is due out around 1815 GMT.
Despite recovering risk demand on Wednesday, some analysts were wary about pushing the dollar significantly lower in the near term. "While the dollar is under some pressure, we would be cautious over further near-term losses, with both swine flu issues and Monday's bank stress test results offering concern," said Tom Levinson, currency strategist at ING.
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