The dollar fell broadly on Tuesday, dented by rising stocks and renewed optimism about the global economy which diminished demand for safer assets and bolstered perceived higher risk currencies. The euro extended gains versus the dollar after a surprisingly strong German sentiment survey, while the pick-up in risk appetite helped sterling and the Australian dollar to 5- and 7-month highs against the US currency respectively.
German economic think tank ZEW said economic sentiment jumped to 31.1 from 13.0 in April, offsetting the negative impact of last week's poor eurozone gross domestic product data and encouraging the view that the worst is over. Investor optimism was reflected in share prices, with European equities up 1.5 percent, while US stock futures pointed to a firm start on Wall Street.
"There is a trend of increasing risk appetite and it's a robust trend which is liquidity-driven, with equity markets rebounding as the market focuses on the positives and brushes aside the negatives," BNP Paribas currency strategist Ian Stannard said.
By 1153 GMT, the euro traded up 0.5 percent against the dollar at $1.3620. Technical analysts now expect the euro to test last week's high of around $1.3721, a breach of which could pave the way for a move towards $1.40. Sterling jumped against the dollar, rallying above $1.55 to its highest level of the year at $1.5514, while oil prices at a six-month high bolstered commodity currencies, with the Aussie dollar hitting a 7-month high of $0.7770.
The New Zealand dollar jumped by 1.6 percent against its US counterpart, which also lost 0.5 percent against the Canadian dollar. Broad losses caused the trade-weighted dollar index to fall 0.4 percent to 82.175, while increased appetite for risk also weighed on the yen, with the euro up 0.3 percent at 130.84 yen while the dollar was steady at 96.17 yen.
Ongoing bets that the global economy has turned a corner has stung the dollar and the yen as traders unwind positions in the two currencies which had been built up since last autumn when the financial crisis escalated. They are perceived to be safe-haven options during times of uncertainty. Sterling was helped higher by reports that the UK has held talks with investors to gauge interest in buying stakes in part-nationalised lenders.
The UK currency dipped back below $1.55, however, after a government source told Reuters that it was too early to talk about the government selling its stakes, though traders said the impact on the pound was small. The Australian dollar meanwhile gained additional support after Reserve Bank of Australia Governor Glenn Stevens said the country's interest rates were "pretty low". Some analysts warned, however, that the rally in riskier assets could be vulnerable to a correction in the event of any bad news on the data front.