The euro was up slightly against the dollar on Tuesday in choppy trading and seen likely to post further gains this week amid strong institutional buying as investors ratcheted up expectations of more eurozone rate hikes. Weakness in stocks and commodities, however, has capped gains in the euro with investors paring back risky trades given fears of a geopolitical backlash following the death of al Qaeda leader Osama bin Laden.
The euro, along with the Australian and Canadian dollars, tends to fall when there is heightened risk aversion in the market. The ECB raised rates last month for the first time since 2008 and is expected to do so again this year, though traders expect it to stand pat when it meets this week. Among major currencies, only sterling was down sharply against the dollar, falling after weak factory data cast doubt on when the Bank of England would lift interest rates. The pound fell nearly 1.0 percent to $1.6487.
In late afternoon trading, the euro was up slightly at $1.4833, more than a cent above its session low and near Monday's 17-month high above $1.49. It rose 1.0 percent against sterling to 89.94 pence. Implied volatility in one-month euro/dollar options rose to more than 11 percent on Tuesday from 10.65 percent on Monday, reflecting heightened uncertainty as to the timing of next ECB rate increase.
The dollar had earlier posted broad gains as investors took profits after weeks of steady selling took it to a three-year low against major currencies on Monday. But by late morning, it was either flat or weaker against all major currencies save sterling.
The dollar has lost nearly 8 percent against major currencies this year - almost 4 percent in April alone - and that prompted profit-taking overnight.
Some analysts have tied the retreat of higher-yield currencies and assets such as oil to fears of reprisal after US special forces killed Bin Laden. The dollar hit a record low of 0.8595 Swiss franc. It was last at 0.8609, down 0.4 percent. The Australian dollar fell after the central bank left rates at 4.75 percent and sounded a bit less hawkish than expected. It last traded at US $1.0855, down 0.8 percent, but not far from Monday's $1.1011, its highest in nearly three decades.