The dollar rose against the euro and high-yielding currencies such as the New Zealand dollar Tuesday, as investors grew cautious of risky trades amid a sell-off in global equities and a surge in oil prices.
The dollar initially sold off after a report showed a record net capital outflow in August, but recouped some of its losses. Traders said the report was a one-off phenomenon that reflected the financial market's meltdown two months ago.
The yen also gained broadly, with investors selling high-yielding assets funded by the currency's cheap rates.
Sluggish corporate earnings, renewed worries about liquidity and credit, and soaring crude oil prices stoked concerns about global growth. On Tuesday, oil jumped to a record above $88 per barrel amid growing tensions in the Middle East, while U.S. stocks weakened, hurt by disappointing earnings from banks such as Wells Fargo.
"There is generalized risk aversion at the moment and the dollar tends to do well in those kinds of environment because it is the most liquid currency," said Shaun Osborne, chief currency strategist, at TD Securities in London.
"The trend against the dollar also appears to be losing momentum. The U.S. economic numbers are not great but they are not a disaster either," he added.
In mid-afternoon trading, the euro traded 0.3 percent lower against the dollar at $1.4162 . Against a basket of currencies, the dollar was up 0.3 percent at 78.266, moving further away from a record low of 77.660 hit earlier this month.
Data on Tuesday showed the United States registered a record net $163 billion outflow in August. Foreign investors fled from dollar-denominated assets during that month as a meltdown in the U.S. subprime mortgage market triggered a global credit crunch. The turmoil prompted a half-percentage-point cut in the benchmark interest rate by the Federal Reserve in September.
Analysts, however, said the report did not signify a long-term trend and capital flows have recovered since that turbulence in August.
"One months' data on investors' portfolio decisions can give a very misleading signal about longer-term trends, especially if the month is one of unusual market volatility like August," said Gabriel de Kock, currency economist at CitiFX in New York.
The capital flows data had its most pronounced impact on the dollar's rate against the yen, with the greenback posting its largest one day drop in about two weeks at current prices, according to Reuters data.
The dollar fell 0.6 percent to 116.70 yen. The euro plunged 0.9 percent to 165.30 yen.
The high-yielding Australian dollar dropped 1.4 percent against the U.S. dollar to $0.8873, while the New Zealand dollar , another high yielder, plunged 2.5 percent to $0.7432. Their fall was a reflection of the current risk-averse environment.
The Canadian dollar also slipped against the U.S. dollar to C$0.9793, showing little reaction to a decision by the Bank of Canada to leave overnight interest rates unchanged. The Canadian central bank, however, had a slight easing bias because of the strong Canadian currency and this summer's credit crunch.
Meanwhile, traders also took note of the drop in U.S. home builder sentiment in October, which fell to a record low as borrowers faced difficulty in getting mortgages from stricter lenders. Housing reports have garnered more attention than usual after the sector's downturn precipitated a global credit crunch.
The dollar showed little reaction to the data, however.