The dollar fell broadly on Tuesday, rattled by signs that the US financial sector, and thus probably the economy, is still far from out of the woods. The Wall Street Journal reported on Tuesday that US investment bank Lehman Brothers may raise up to $4 billion in new capital, suggesting the firm could post its first quarterly loss since going public.
The news added to risk aversion stoked during the previous session after Standard & Poor's cut its credit ratings on Lehman, Merrill Lynch and Morgan Stanley and said their outlooks were predominantly negative. "Given the downgrades by S&P yesterday and the WSJ story with regards to Lehman, it's easy to see why risk aversion is rising," said Simon Derrick, head of currency research at Bank of New York Mellon.
"Rising risk aversion has been a dollar negative over the last few months because it implies the Fed will have to wait a little longer before it can start hiking rates," he added. He said the euro, in contrast, was benefiting from Eurogroup chairman Jean-Claude Juncker giving his backing to the European Central Bank's hawkish, inflation-fighting stance, rather than complaining about the euro's strength.
"That sounds to me like a shift in sentiment within the Eurogroup that says when commodity prices are this elevated, maybe having a high euro means some of these issues are offset to a degree," Derrick said. By 1018 GMT, the euro was up 0.35 percent at $1.5598.
It also added 0.4 percent to 79.29 pence, as sterling suffered from its close correlation with bank shares, which were dragged lower by the Lehman news. A profit warning by Britan's biggest buy-to-let mortgage lender Bradford & Bingley on Monday also weighed on the pound. The dollar index fell a third of a percent to 72.706, testing a key support level.
Tuesday's US calendar features a speech by Federal Reserve Chairman Ben Bernanke at 1300 GMT, followed by durable goods and factory orders figures for April at 1400 GMT. In the eurozone, the week's highlight is the ECB interest rate decision and news conference on Thursday, with president Jean-Claude Trichet expected to stress inflation risks.
Data on Tuesday showed annual eurozone producer price inflation surging to 6.1 percent, its highest in 7-1/2 years, while first quarter growth was revised slightly higher. "The combination of a robust start to the year in activity terms and ongoing inflation pressure indicates that the ECB will likely retain a hawkish bias," Calyon said in a research note.
"Eventually, we still believe that downside pressures on the economy will weigh on the euro ... but in the short term such bullish data continues to weigh on Bund prices and (boost) the euro," the bank added, recommending euro longs with a target of $1.5910 and a stop at $1.5460.
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