Dollar slips in London

The dollar fell against a basket of currencies on Tuesday, retracing much of the previous days sharp gains as investors focused on stock market gains that have tended to undermine flows into the US currency. Some easing of wariness towards risk allowed the euro a technical bounce against the dollar, while sterling lengthened losses versus the common currency on continued worries about the health of Britains banking sector.
Meanwhile, the yen erased losses and rose versus the dollar, though doubts about the Japanese currencys status as a safe port in the global economic storm ensured it kept an overall defensive tone, traders said. "Were seeing a bit of a risk-on" day, which usually equates to dollar selling," said State Street Global Markets strategist Lee Ferridge.
"But the market is still very fickle and very nervous at the moment." The dollar index, a gauge of its performance against six major currencies, fell 0.9 percent to 88.483, off last weeks three-year high of 89.624. European equities rose on Tuesday, with US stock market futures also pointing to a higher open on Wall Street.
- But data remained relentlessy gloomy with industrial output in Sweden falling 22.9 percent on the year in January, while UK January industrial output fell at its fastest annual pace since 1981. Debt issued by the two countries has sold-off since mid-February and Bank of New York Mellon says this could explain the ongoing under-performance of both the crown and sterling against the euro in recent weeks.
The euro rose 1.25 percent to $1.2767, rebounding from a three-month low of $1.2455 hit last week according to Reuters data was also firmer against sterling at 92.04 pence, off a 5-1/2 week high of 92.18 pence.
The euros gains versus the dollar were briefly dented after ECB Executive Board member Lorenzo Bini Smaghi was quoted as saying the bank was prepared to cut interest rates to zero if deflation threatens and the economic situation worsens. But, ECB Governing Council member Axel Weber, later said he saw 1 percent as the lower limit for euro zone interest rates.
The pound managed to recover from a six-week low against the dollar, rising 0.7 percent on the day to $1.3871. But the rebound was on shaky ground after it shed 2 percent on Monday when Lloyds Banking Group intensified sector worries with its announcement the British government was taking a stake of up to 77 percent.
Pressure from the Bank of Englands quantitative easing programme was also reflected in bond markets as the yield on benchmark 10 year gilts held near its lowest level in more than 50 years, having fallen below 3 percent on Monday. The dollar reversed early gains against the yen, last down 0.5 percent at 98.27 yen, but the Japanese currency stayed weaker versus a broadly stronger euro at 125.50 yen.
The yen has fallen in the past month as Japans economy grapples with diving exports and its worst recession of the post-war era. Its current account balance swung to the largest deficit on record in January, adding to selling pressure.