The dollar struggled to pull away from a three-year trough on Tuesday with higher-yielding currencies such as the Australian dollar still seen in favour even as markets become more concerned over stretched positions. A steep fall in silver the previous day highlighted just how vulnerable overbought assets can be to a sudden sell-off and suggested investors may be primed to take profits.
The dollar index, which tracks its performance against a basket of major currencies, was last up 0.1 percent at 73.026, still not far off a three-year low of 72.722 hit this week. Its decline in the past few weeks has taken it ever closer to a record low of 70.698 set in March 2008.
"There could be some exhaustion in terms of dollar selling. The fact is, from a pure market positioning perspective, the market is extremely short US dollars," said Mitul Kotecha, head of global FX strategy at Credit Agricole in Hong Kong. The Canadian dollar went against the grain, enjoying a relief rally as Canada's ruling Conservatives won a crushing victory in a federal election.
Provisional results showed the Conservatives had 166 seats in Parliament, well above the 155 they needed to transform their minority government into a majority. The US dollar slid 0.4 percent to C$0.9474, nearing a 3-1/2 year low of C$0.9440 hit last week. The US dollar was mostly higher against other major currencies, with the euro dipping 0.1 percent to $1.4812, pulling away from a 17-month high of $1.4903 hit the previous day on trading platform EBS.
The fact that currency speculators have already piled up bets against the dollar means the dollar could gain a lift if short-covering sets in. Sentiment for the dollar has been overwhelmingly bearish as ultra-loose US monetary policy has made it the funding currency of choice in popular carry trades that have helped propel the Aussie to a 29-year high of $1.1012 on Monday.
The Australian dollar dipped after Australia's central bank kept interest rates unchanged at 4.75 percent as expected. The Reserve Bank of Australia said underlying inflation looked to have bottomed and would increase somewhat as the economy strengthened, sounding a little less hawkish than some analysts had expected.
The Aussie dollar last stood at $1.0910, having dipped from around $1.0920 after the RBA's decision. The Aussie also fell against the yen, touching an intraday low near 88.25 yen and was last down 0.6 percent at 88.36 yen. Against the yen, the dollar dipped 0.3 percent to 81.02 yen in light trade, with Japanese markets closed for a national holiday. The dollar fell as low as 80.971 yen earlier on Tuesday, its lowest in more than a month.
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