The dollar fell against the euro on Wednesday, after hitting a six-month high the previous day as German business morale slumped to multi-year lows and reinforced views the European Central Bannk will eventually cut rates. The euro had slid on Tuesday after the Ifo German business climate index in August fell to a three-year low, the latest sign that weakness in the US economy had spilled over into other major economies.
The euro, sterling and high-yielding currencies such as the Australian dollar have slid sharply since late July due to mounting signs that economic weakness has spread beyond the United States.
The dollar is expected to be supported from global economic deterioration as the Federal Reserve was likely to keep interest rates on hold in the coming months while central banks in the euro zone, Britain, Australia and New Zealand were seen lowering interest rates, either this year or sometime next year. But as investors pared back positions on Wednesday, the dollar slipped broadly, falling 0.5 percent against a trade-weighted basket of six major currencies and off the eight-month high of 77.619 hit on Tuesday.
For the month, the dollar index was still up 5 percent, set for its biggest monthly gain since January 1997. "Fund operators are trimming their long dollar positions. The moves are not being caused by any particular factors," said Shuichi Kanehira, a senior forex trader at Mizuho Corporate Bank.
The euro rose as high as $1.4744 bouncing back to levels before the single currency hit a six-month low of $1.4570 on trading platform EBS on Tuesday. The euro was up 0.5 percent to $1.4720, with traders citing as a factor buying by trend-following Commodity Trading Advisers or CTA funds, also known as managed futures firms.
Sterling rose 0.4 percent to $1.8466 after slumping to a two-year trough of $1.8330 on Tuesday. The dollar fell 0.5 percent against the yen to 109.05 yen dragged down by selling by Japanese exporters. Such commercial flows tend to pick up towards the month-end. A near $1 increase in oil prices to above $117 and New Zealand's better-than-expected business confidence data also reinforced dollar selling.
DOLLAR SEEN SUPPORTED: The dollar was likely to remain supported by a process of elimination, traders said, despite lingering worries about US financial institutions' losses from the turmoil in credit markets. "There are various negative factors against currencies other than the dollar, and we are not in a risk-taking environment," said Kanehira at Mizuho Corporate Bank.
The Fed is seen likely to raise US interest rates by around 50 basis points from the current 2.0 percent by next August. "Whether it's cable, the euro, Aussie or kiwi, there is little sign yet that they have bottomed out," said a trader for a major Japanese trading house.
Higher-yielding currencies likely have more room to fall, especially against the yen, he said. The Australian dollar rose 0.5 percent to $0.8591 having edged up from an 11-month llow of $0.8493 hit on Tuesday. Interest rate futures are pricing in a 25 basis point rate cut by the Reserve Bank of Australia early next month to cushion the economy.
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