The dollar edged up against major currencies on Tuesday, while the Australian dollar trimmed losses after the country's central bank hiked interest rates to an 11-year high and suggested more tightening may be needed.
The Reserve Bank of Australia lifted rates by a quarter-point to 7 percent and said a "significant" slowing of growth was needed to keep inflation contained, which traders took as a signal that more rate rises could be in store. "The statement indicates that they could tighten more," said Shogo Nagaya, forex manager at Nomura Securities.
"This should keep high-yielding currencies supported for now." But the RBA, whose move contrasts with other major central banks that are cutting rates to counter the fallout from a US economic slowdown, also acknowledged that inflation will moderate next year and global growth will be below trend in 2008.
The Aussie initially dipped on those remarks but later recouped some losses to hover near a three-month high versus the dollar on the view that ongoing rate rises would keep adding to the currency's yield appeal. Money markets are expecting another quarter-point increase this year.
Data on Tuesday showing surprisingly robust Australian retail sales in the fourth quarter highlighted the risk of higher rates. The Aussie is one of the best-performing major currencies so far this year, climbing 3.5 percent against the dollar.
"Today's stream of data shows that more needs to be done by the RBA to cool an overheating economy," said Sharada Selvanathan, a currency strategist at BNP Paribas in Hong Kong. The dollar was little changed as investors await other key central bank decisions this week and more US data for clues about whether the economy is falling into a recession that may require more sharp Federal Reserve rate cuts.
Activity in Asia was subdued, partly due to Lunar New Year holidays across much of the region later in the week. The dollar was little changed from late US trade at 106.79 yen holding above a three-year low of 104.95 yen struck in January.
The Aussie slipped 0.25 percent to $0.9060 edging down from a three-month peak of $0.9102 hit on Monday, but hovered above the day's low $0.9030. The euro held steady at $1.4814 after having jumped on Friday to near its lifetime high of $1.4968.
The dollar had tumbled after data on Friday showed US companies shed workers in January for the first time in 4-1/2 years, but the US currency then bounced back as another report showed an unexpected rebound in manufacturing activity.
The Bank of England is seen cutting rates by a quarter-point to 5.25 percent this week, in what would be its second such move in the past three months. While the European Central Bank is expected to keep policy on hold at 4 percent and emphasise its worries about price pressures, investors believe the deteriorating global outlook will prompt the ECB to cut rates towards the end of the year.
"Until the uncertainty surrounding domestic and global prospects resolves itself, we expect the ECB and BoE will remain cautious about easing policy in the face of upside risks to inflation," currency strategists at Barclays Capital said in a note to clients.
The dollar has slid back near a record low against the euro as the Fed has slashed rates to 3.0 percent, the lowest among most major currencies, as it tries to fight off a potential recession from the economy's housing-led downturn.
The performance of stock markets also remains a driver of currencies, with any equity gains seen as giving the green light for market players to put on carry trades - borrowing funds in low-yielding currencies like the yen to buy higher-yielding currencies. Worries that US consumers are falling behind on credit card and debt payments hurt Wall Street stocks on Monday. Tracking that fall, Japan's Nikkei average fell 0.75 percent.