Dollar rises before Fed; emerging markets stabilize
The dollar rose modestly against the yen and euro on Tuesday as investors stepped back into stock and emerging markets whose recent sell-off drove money into safe-haven currencies.
The greenback might receive another boost if the Federal Reserve were to further pare its bond-purchase stimulus despite data suggesting the domestic economy lost some momentum at the end of 2013, analysts said.
U.S. central bank officials will begin a two-day policy meeting later Tuesday, where analysts expect the Fed would decide to reduce its monthly bond purchases in February by $10 billion to $65 billion.
(Read more: Will the Fed throw emerging markets a bone?)
Such a move is perceived as positive for the dollar since it would reduce the amount of cash the Fed injects into the banking system, although the Fed's tapering which began in December has hurt emerging market currencies because the dollars created had flooded into fast-growing nations in Asia, Africa and Latin America.
"The Fed is squarely focused on the domestic economy. It will continue to taper," said Russ Koesterich, global chief investment strategist at BlackRock in San Francisco, which manages $4.1 trillion.
"The volatility in emerging markets is not over. It will be with us for some time. There are still structural problems with some of these markets," Koesterich added.
The central banks of some key emerging economies sought to soothe investor concerns.
(Read more: Will New Zealand defy consensus and raise rates?)
The Indian rupee booked its biggest rise in more than two months after the Reserve Bank of India surprised with an interest rate hike on Tuesday.
Later Tuesday, Turkey's central bank is expected to raise its lending rate to about 10 percent at an emergency meeting in a bid to halt the slide of its currency.
The rupee improved 0.9 percent against the dollar at 62.56 rupees per dollar, while the Turkish lira gained about 1.3 percent against the dollar at 2.25 liras.
The recovery in emerging market currencies helped lift global stock prices with the MSCI world index gaining 0.2 percent.
The dollar in the meantime held steady against the euro and recovered further against the yen in the wake of much weaker-than-expected readings on U.S. durable goods orders in December.
The dollar rose 0.3 percent against the yen at 102.83 yen after hitting a seven-week low last Friday.
The euro dipped 0.07 percent against the greenback at $1.3662, retreating from about 3-1/2-week high set last Friday.
The durable goods data were mitigated by a stronger-than-expected January pickup in U.S. consumer confidence and an in-line growth in U.S. home prices in November.
The surprise December drop in durable goods raised some doubts whether the Fed tapered its third round of quantitative easing too soon.
(Read more: Is the euro headed for an Aussie-style crash?)
"They began tapering not because they saw the economy on a firmer footing but rather because they were concerned with the rapid rise in the Fed's balance sheet with little to show for it in economic strength," said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange in New York.
"The markets, especially emerging markets, are taking the view that tapering is as good as ending or reversing QE," Borthwick said.
As investors await the Fed's next move, they dipped their toes back into stocks and commodity-linked currencies such as the Australian dollar.
Worries over how the Australian economy will hold up in the face of slackening commodity markets and a slowdown in China were eased somewhat by the NAB measure of business conditions, which jumped to its highest in more than 2-1/2 years.
The Aussie dollar rose to $0.8769, pulling away from Friday's low of $0.8660, its lowest level since July 2010.