The dollar was little changed against the euro and rose against the yen on Wednesday as a spike in investor aversion to risk tentatively faded and US stocks indexes rebounded from Tuesday's swoon. However, the dollar was still down against sterling and had to fight back from a record low against the euro reached earlier on Wednesday.
The near-term outlook for the greenback remained quite negative due to uncertainty regarding the deteriorating subprime mortgage industry, and its potential to spark a credit crunch and cause investors to flee risky trades. "Essentially, the equity market has been dictating what's happening with the dollar.
US stocks got a little bit of a boost even though the subprime news is all bad," said John McCarthy, director of foreign exchange at ING Bank in New York. US stocks rallied and Treasury yields climbed on Wednesday on the view subprime-related fears were a bit overdone the previous session. However, caution remained the watchword in all markets.
"The recovery in stocks drove people into selling yen again, unwinding what we did yesterday. But in the broadest terms, the mindset is still to sell the dollar because of the subprime issue, and the yen because of low interest rates," he added. By mid afternoon, the euro was at $1.3747. Earlier the euro rose to a record high of $1.3787, according to electronic trading platform EBS.
Against the yen, the euro rose 0.5 percent to 168.12. Sterling was up 0.3 percent at $2.0323, after hitting a 26-year peak of $2.0363, according to Reuters data. The dollar recovered from a one-month low below 121.00 yen to trade up 0.5 percent at 122.28 yen.
The dollar's sell-off has been widespread and rather deep. The Federal Reserve's daily trade-weighted index of the dollar against a group of seven major currencies fell to a record low on Wednesday. The sudden resurfacing of subprime mortgage issues in the currency market made analysts cautious about predicting an end to the current round of dollar weakness.
Recommending that investors sell dollars and buy yen, Morgan Stanley foreign exchange strategists said, "The dollar is likely to remain under pressure until credit concerns either ease or spread to non-US markets. We think this pressure will also be accompanied by outperformance of financing currencies such as the Swiss franc and the yen."
Commerzbank currency strategists similarly believe the dollar remains vulnerable to further selling, particularly against the euro, which they see rising to $1.40 in coming weeks. The dollar's sell-off on Tuesday was fuelled by reports from Standard & Poor's and Moody's Investors Service that warned of ratings cuts on $17 billion of debt related to risky mortgages, much of it subprime. Subprime loans are extended to borrowers with poor credit.
"This will not be the last bout of bad news to emanate from the US mortgage and/or housing market in coming weeks and months and by implication, the risks to the dollar are unlikely to dissipate soon," Commerzbank said.