The dollar inched back towards one-month lows against a basket of currencies on Tuesday, as oil prices near record highs fed concerns about the deteriorating US economy. Activity is expected to pick up later in the session as investors return from long weekends in both the United States and Britain, with market players looking to oil prices and stocks for clues on the dollar's near-term direction.
Traders said further gains in oil prices would likely hurt the dollar. "Oil, or commodities in general, is the focus in the currency market," said Hiroshi Yoshida, a forex trader at Shinkin Central Bank. "With oil prices rebounding above $133 a barrel, the dollar is likely to test the downside this session as London traders enter the market," he added.
Financial markets in the United States and the United Kingdom were closed on Monday for Memorial Day and a bank holiday, respectively. US crude oil futures rose 0.7 percent on Tuesday to above $133 a barrel on concerns about supply from Nigeria.
Crude oil has soared about 20 percent in May alone to record levels above $135 a barrel. This is fanning fears over the ability of US consumers and businesses to weather the credit- and housing market-led economic downturn and prevent the economy from sliding into full-blown recession.
The dollar index was down 0.1 percent on the day at 71.922, within sight of the one-month low of 71.823 struck last week. The euro edged up 0.1 percent to $1.5794 The single European currency hit an all-time high above $1.60 last month. The dollar steadied against the Japanese currency at 103.45 yen.
The New Zealand dollar rose after a survey showed that business confidence improved slightly in May. It extended its rebound from two-year lows versus the Australian dollar, which it hit last week due to diverging expectations for the two countries' monetary policies.
New Zealand's central bank is expected to start cutting rates by the end of September as the economy is seen slowing sharply in the current year, while the Australian central bank is projected to raise rates later in the year. The kiwi was up 0.3 percent against the US dollar at $0.7888 and up 0.4 percent at 81.65 yen. Investors also expected economic data and speeches this week by Federal Reserve officials including Chairman Ben Bernanke on Thursday to provide a clearer picture of the deteriorating US economy.
"Any weaker-than-expected data is highly likely to trigger dollar selling as investors are now focusing on the slower US economy," said Shuichi Kanehira, a senior forex trader at Mizuho Corporate Bank. The dollar looked vulnerable ahead of Tuesday's data for new home sales in April, which will provide further clues about the state of the struggling US housing market.
With economists expecting the data to show slower sales last month, Yoshida at Shinkin Central Bank said the dollar could test as low as 102.50 yen after the data lands. Other data on the radar on Tuesday include the S&P Case/Shiller home price index for March and the Conference Board's consumer confidence reading for May.