The dollar was steady on Tuesday after falling near a record low against the euro the previous day as investors believe the worst of the problems in the US financial system are not yet over. While the dollar has recovered somewhat after better results than expected from big financial institutions such as Citigroup J.P. Morgan Chase and Bank of America investors are awaiting more earnings reports this week.
The euro may gain against the yen as Japanese investors ship more funds into higher-yielding currencies for better returns, with traders watching whether the single currency tops Monday's record high and reaches the 170 yen level. With no major data or events scheduled, major currencies were likely to stay confined to narrow ranges as many market players kept to the sidelines, traders and analysts said.
"The big bout of dollar weakness is behind us, but there is still mileage here, mainly coming from the fact that there is still disappointing data to work through in the United States before we have a rebound at the end of this year," said Jan Lambregts, head of research for Asia at Rabobank.
The dollar inched up 0.1 percent to 106.50 yen Traders cited Japanese exporter selling between 106.50 and 106.80 yen, while near-term support was seen around 106.10 yen. The euro was little changed at $1.5915 It was also nearly flat against the yen at 169.49 after rising to the day's high near 169.70 yen, which was not far from the record high of 169.91 yen hit on Monday.
With the economy suffering as the credit crisis hits the housing market and banks, expectations for the Federal Reserve to raise interest rates before the end of the year to curb inflation pressures are fading quickly, hurting the dollar.
Compared with the Fed's 2 percent policy target, the European Central Bank's 4.25 percent rate keeps the euro attractive, traders said. "The dollar's direction will be dictated by the euro, which has more scope for a rise," said a senior dealer at a Japanese trading firm.
"The euro may also benefit from an ongoing outflow of funds from Japan as Japanese investor appetite for higher-yielding overseas assets remains solid," he said. The market's focus remains on a rescue plan for troubled US mortgage finance giants Fannie Mae and Freddie Mac US Treasury Secretary Henry Paulson said on Sunday he was optimistic that Congress would approve the government's request for authority to shore them up.