The dollar gained marginally while the yen strengthened against other major currencies on Tuesday, as risk sentiment was hit by renewed concerns about the US banking sector and tumbling share prices. The Japanese currency hit a seven-week high against the euro and a one-month high against the dollar.
The Wall Street Journal reported regulators have told Citigroup and Bank of America they may need to raise more capital based on early results of government stress tests on banks.
European shares tumbled more than 2 percent by midday trade, prompting investors to seek the perceived safety of the dollar and yen. Lingering concerns about the implications of an outbreak of swine flu over the weekend also weighed on sentiment.
The World Health Organisation lifted its pandemic alert to phase 4 from phase 3, but also said it did not recommend any travel restrictions or border closures. "The flu story and the story on Citi and Bank of America have spooked the whole market," CMC Markets analyst James Hughes said. "We will have to wait until the results of the stress tests on May 4 and it does raise fears because Citi and Bank of America are not necessarily the worst hit," he added.
By 1050 GMT, the dollar fell 0.3 percent against the yen to 96.29 yen, after falling as low as 95.63 yen. The euro lost 0.4 percent against the Japanese currency to 125.30 yen, having earlier hit a seven-week low around 124.38 yen on EBS trading systems.
The euro pared some losses after better-than-expected first quarter earnings results by Deutsche Bank and Spanish bank BBVA, traders said. The dollar index rose 0.1 percent to 85.771. The euro was flat at $1.3011 The yen also gained as hedging by Japanese exporters surged on Tuesday ahead of Japan's "Golden Week" holiday period from Wednesday through May 7, analysts said.
Japanese market players were selling dollar/yen on risks of further downside before the US stress test results, traders said. "Our order book shows greater exporter activity today," Bank of Tokyo-Mitsubishi UFJ said in a note. The Mexican peso fell to near a one-month low against the dollar after taking its biggest tumble the previous day against the greenback in six months.
The peso was quoted around 14.092 per dollar, according to Reuters data, having hit a session low of 14.135, its weakest since the start of this month. Later in the session, the latest S&P Case/Shiller US home price index is released at 1300 GMT and US consumer confidence data at 1400 GMT. German preliminary inflation figures will also be eyed, with regional data so far suggesting prices ticked up in April.
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