High-yielding currencies rallied on Wednesday, reversing losses in the prior session, as investors concluded China's unexpected monetary policy tightening would not derail the world's third-largest economy. Commodity-linked currencies such as the Australian dollar recovered some losses but the market remained nervous that the withdrawal of liquidity may prompt unwinding of positions in riskier assets as economies recover and central banks focus on inflation risks.
"Commodity currencies are on a much better footing today, but what happened in China is a reminder that they are vulnerable," said Omer Esiner, senior market analyst at Travelex Global Business Payments in Washington.
Esiner said the reaction to China's measures Tuesday was too far, too fast and that with more thought, investors realised the impact of China's moves won't be detrimental to global economic growth. In late afternoon trading in New York, the Australian dollar climbed 1 percent to 84.50 yen after its biggest daily drop in about eight weeks on Tuesday. It also rose 0.4 percent to $0.9240 against the US dollar, with traders noting sovereign demand facilitating the move.
The yen declined broadly, paring Tuesday's gains after China's central bank raised banks' required reserves ratio, a move which prompted investors to unwind yen-selling positions. The dollar rose 0.5 percent to 91.43 yen after falling to 90.73 Tuesday. The euro was up 0.6 percent to 132.67 yen.
The New Zealand dollar rose 0.2 percent at to US $0.7398 with the New Zealand currency climbing 0.7 percent against the yen to 67.65 yen. The euro was last up 0.1 percent at $1.4508, according to Reuters data. Earlier it hit $1.4582, its highest since December 16. Traders said demand from Asian sovereign entities helped support the euro zone single currency as well as bullish technical indicators.
Still, euro gains were capped as data showed the German economy contracted more than expected in 2009. The dollar index, which tracks the performance of the greenback versus a basket of six major currencies, was little changed after dropping to its lowest since mid-December earlier in the session. Analysts said the focus may turn now to the US corporate earnings season, which ramps up this week, and reports on US retail sales and weekly jobless claims Thursday.
A Federal Reserve report showing US economic activity remained at a low level as 2010 began but was improving modestly and beginning to broaden out to include wider swaths of the country had limited impact on trading. Similarly, a US Treasury Department report showing the United States racked up a $91.85 billion budget deficit in December, a record for the month and marking a record 15th straight month of government deficits, was largely overlooked.
Sterling rose as high as $1.6306, its highest since mid-December, after Bank of England policymaker Andrew Sentance said in a newspaper interview that the central bank was close to holding back on stimulus. It last traded up 0.7 percent at $1.6286. The pound was also boosted after UK industrial production data came in stronger than expected. The Swiss franc briefly dipped against the euro to 1.4804 francs.
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