The dollar cut early broad-based losses on Tuesday, as sterling fell and euro gains lost steam with European stock markets at record lows starting to draw nervy investors back towards dollar liquidity. Euro gains were also stemmed after European Central Bank governing council member Christian Noyer said the euro area's central bank was studying whether to go further with unconventional monetary policy and considering all options.
The higher-yielding Australian dollar was cheered after the Reserve Bank of Australia unexpectedly left interest rates on hold, but market stress showed through via credit default swaps as the cost of protection against Australian sovereign default hit record highs.
Illustrating how fragile markets are, European equities fell to a lifetime low briefly pushing US stock futures into negative territory. "We are seeing an inverse correlation between the dollar and stock markets. When people are trading on fear about the global economy then that benefits the dollar," said Chris Gothard, currency strategist at Brown Brothers Harriman in London.
The dollar index, a gauge of its strength against a basket of six other major currencies, cut early losses to stand down 0.3 percent on the day at 88.763. It had earlier retreated sharply after hitting a three-year high in overnight Asian trade. The euro was up 0.2 percent at $1.2606 but well away from intraday highs of $1.2677, according to Reuters data. Sterling turned negative as stocks stumbled. It was last down 0.1 percent at $1.4040.
The RBA kept rates unchanged at 3.25 percent on Tuesday, confounding hopes for a cut, saying stimulus already in the pipeline was helping the country avoid the depths of recession seen elsewhere.
The Australian dollar jumped 2 percent to $0.6420. But the euro and sterling lost ground after the OECD said it expected further significant rate cuts from major central banks including the ECB and Bank of England, with rate verdicts due from both later this week.
Before the ECB and BoE, the Bank of Canada is expected to cut its key interest rate by half a point to a record low of 0.5 percent. The ECB is expected to cut interest rates to an all-time low of 1.5 percent from the current 2 percent, with the BoE also seen cutting by 50 basis points to a record low 0.5 percent and possible detail the roll-out of alternative monetary policy strategies. Technical strategists say the pound is vulnerable to key support at $1.3850, which could open the way to a fresh 23-year low.