The dollar fell to its lowest level this year against the euro and a basket of currencies on Tuesday, reversing earlier gains due to the ongoing belief that the global economy is on the road to recovery. The US currency had begun the day staging a modest recovery after Monday's steep falls, but this soon petered out as US stock futures turned higher, helping to renew the recent rally in higher risk currencies.
Sterling hit a fresh seven-month high versus the greenback, while the Australian dollar rose to a fresh eight-month peak to extend the previous day's gains. Analysts said the dollar's failure to recover shows investors are convinced by the view the global economy is over the worst, which is encouraging them to buy higher risk currencies and assets.
"I think what we're seeing is just another indication of the sentiment out there in the market," Standard Bank head of G10 currency research Steve Barrow said. "Any bouts of weakness in any currencies against the dollar are proving very short-lived," he added. The dollar index fell to a low of 78.524, its weakest since mid-December. The euro meanwhile hit a 2009 high of around $1.4281.
The Australian dollar jumped around 0.9 percent to touch a fresh 8-month high of $0.8186, having earlier fallen as low as $0.8050, while sterling hit a seven-month high of $1.6502.
The New Zealand dollar, another higher-risk currency, also touched an eight-month high against its US counterpart of $0.6568. Sterling had come under pressure earlier in the day, pressured by news an Abu Dhabi government-owned firm sold its shares in major UK bank Barclays.
The Australian dollar had also slipped earlier after the Reserve Bank of Australia held interest rates at a record low of 3 percent on Tuesday, but said there was scope to ease further if needed. But investors soon bought back into the global economic recovery story as they continued to draw optimism from Monday's stronger-than-expected manufacturing activity surveys out of China, the eurozone, the UK and the US.
They shrugged off Tuesday's news that eurozone unemployment rose to 9.2 percent in April, the highest since September 1999. Analysts noted the dollar's recent fall has coincided with money shifting out of US Treasuries and into emerging markets equities and other assets.
"It is not so much a flight from the dollar as it seems, but an expressed preference for assets with greater yield-enhancement potential," said Neil Mellor, currency strategist at Bank of New York Mellon. In other news on Tuesday, US Treasury Secretary Timothy Geithner continued to reaffirm his faith in a strong US currency. He sought to reassure China over its huge holdings of US Treasury debt because Washington is committed to keeping the dollar strong and inflation low and stable.