Dollar slips, Aussie up

The dollar slipped on Tuesday as short-term speculators bought the euro and other higher-yielding currencies after the Reserve Bank of Australia unexpectedly left interest rates on hold. But activity was subdued as investors took a wait-and-see stance, believing that falling share prices, increased worries about the financial system and fears about the deepening global recession could spark more risk aversion that would lift the dollar.
The dollar index, a gauge of its strength against a basket of six other major currencies, hit a three-year high in early Asian trade as investors sought the safety of the world's most liquid currency.
But it erased gains as the RBA kept rates unchanged at 3.25 percent on Tuesday, confounding hopes for a cut, saying stimulus already in the pipeline was helping the country avoid the depths of recession seen elsewhere. "The RBA's rate decision surprised market participants, prompting those who had expected a rate cut to cover short Aussie positions," said a senior forex trader at a big Japanese bank.
The euro received a boost as speculators bought back the European single currency following a jump in the Australian dollar, and ahead of a policy meeting by the European Central Bank later this week.
"A rise in higher-yielding currencies is likely to be short-lived as investors know their downtrend would not be reversed so easily unless central banks in Europe finish lowering rates," the trader said. The euro rose 0.7 percent from late US trade to $1.2670, recovering the losses suffered in the wake of European Union leaders' rejection of a mass bailout for Eastern Europe, which weighed on the single currency the previous day.
Against the Japanese currency, the euro climbed 0.7 percent to 123.48 yen, after touching the day's low of 121.73 yen on EBS. It poked above 126.00 yen last week to a seven-week high.
As the RBA's rete announcement has passed, traders are focusing policy meetings by the ECB and the Bank of England. The ECB is expected to cut interest rates to an all-time low of 1.5 percent from the current 2 percent on Thursday. A Reuters poll showed that the Bank of England is also expected to cut rates, by 50 basis points to a record low 0.5 percent when it meets on Thursday.
Sterling was up 0.6 percent at $1.4133. The Australia dollar soared 2.2 percent to $0.6428 and 1.9 percent to 62.60 yen. The dollar was little changed at 97.52 yen, staying below a 3-1/2 month peak of 98.72 yen struck last week. Analysts said it was still too early to expect a sustained yen bounce despite concerns over the US and European financial sector.
The dollar index fell 0.7 percent to 88.400 after hitting a new three-year high of 89.026. The US currency was supported the previous day as steep losses on Wall Street and dire financial news including insurer AIG's record loss increased worries about the global credit crisis, boosting the dollar's safe-haven allure.