The dollar was mired near recent record lows against the euro on Tuesday, with concerns about the US financial sector continuing to erode sentiment. The US currency had gained slight support on Monday after forecast-beating second quarter results from Bank of America, but further dismal US earnings including from American Express reinforced corporate stress.
With no first tier euro zone or US data on the calendar until Thursday's German Ifo business morale index and euro zone flash Purchasing Managers Indexes, major currencies were seen staying in relatively tight ranges. Analysts said that while sentiment on the dollar remained weak, nagging worries on the euro area economy were holding the common currency back from record highs above the $1.60 mark.
"The market is still focusing to risks to the US economy in the second half of the year, but for now there doesn't seem to be enough impetus to push the euro that much higher past $1.60," said Antje Praefcke, CBCM FX strategist in Frankfurt. By 1030 GMT, the euro was flat at $1.5921, just over a cent off its record high of $1.6038 set last week according to Reuters data.
The euro also held steady at 169.37 yen, near a historic peak of 169.92 set on Monday. The yen fell in the previous session after the stronger than expected Bank of America results encouraged investors to edge back into relatively risky carry trades, where they sell the low yielding currency to fund purchases of higher yielding assets. The yen was also flat at 106.34 yen.
Investors will look for further clues on the health of the US banking sector and wider economy when second quarter results from Wachovia and Yahoo are published. With the US economy still experiencing shocks from a global credit crisis, expectations that the Federal Reserve would raise interest rates before the end of the year to curb inflation pressures have faded.
Compared with the Fed's 2 percent policy target rate, the European Central Bank's 4.25 percent base rate has kept the euro attractive for yield-hungry investors. But there are further signs of the euro zone economy fraying. Data released earlier showed Italian consumer morale plunging to its lowest for nearly 15 years in July as sentiment crumbled over the state of the economy and future prospects.
Federal Reserve Bank of Philadelphia President Charles Plosser speaks on the economic outlook at 1230 GMT. Analysts said investors also continued to focus on a rescue plan for troubled US mortgage finance giants Fannie Mae and Freddie Mac.
US Treasury Secretary Henry Paulson said on Sunday he was optimistic that Congress would approve the government's request for authority to shore them up. The White House said on Monday it hoped for progress on the rescue plan by the end of this week. Paulson is scheduled to speak again at 1200 GMT. "Treasury Secretary Paulson will opine on markets later today, presumably spending part of the time making the case for his (Fannie and Freddie) bailout plan as Congress resists," Calyon strategists said.
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