The dollar hovered just above a 15-month low against a basket of currencies on Tuesday as investors looked to return to leveraged carry trades, while sterling tumbled after a warning on Britain's credit rating. Fitch Ratings said that of the four major economies with AAA status, the UK was the most at risk, sending the pound down sharply to shed as much as 1 percent on the day against the dollar before it recovered half a cent from the lows.
David Riley, co-head of global sovereign ratings at Fitch, said if there was another significant fiscal stimulus package in Britain its rating would be at risk. The pound slipped as far as $1.6600 from above $1.6750 before edging back to $1.6650 and fell more than 0.5 percent on the day to beyond 90.00 pence per euro, before paring losses to 89.93 pence.
An index of the dollar's performance against six major currencies edged up 0.1 percent to 75.130, having dropped about 1 percent the previous day to as low as 74.93, its weakest since August 2008. It was the biggest one-day fall since late July. Expectations that US interest rates are likely to stay near zero for a while are encouraging investors to use the dollar to fund carry trades in higher-yielding assets.
But other currencies retained much of their gains against the dollar made on Monday when the aftermath of a G20 meeting reinforced expectations for US rates to stay low for a while. The euro edged down 0.1 percent to $1.4980, after gaining about 1 percent on Monday and rising above $1.50 for the first time since late October, nearing its 2009 high of $1.5064. Traders said a number of option strikes were lurking around the $1.5025 level.
Some profit-taking emerged on the euro and other yen crosses before a US market holiday on Wednesday, with sterling also dropping against the Japanese currency. The dollar eased 0.1 percent to 89.85 yen, with talk of profit-taking likely above 90.00 yen and options located above that level, dealers said. The euro slid 0.3 percent to 134.59 yen, having gained more than 1 percent on Monday.
A host of officials from the Federal Reserve are expected to speak in the coming hours and the market will watch what they say regarding the outlook for interest rates and the eventual withdrawal of easy monetary policy measures. The speakers include Dennis Lockhart, Janet Yellen, Eric Rosengren and Richard Fisher.
The Australian dollar rose as high as $0.9324, nearing a 15-month high at $0.9330, helped by higher commodities and a jump in gold prices. Australia is a big exporter of industrial raw materials. It later slipped to $0.9276 after gaining 1 percent on Monday. The New Zealand dollar, which jumped more than 2 percent on Monday, inched back to $0.7393.
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