The dollar rose against most major currencies Tuesday after Citigroup said it will sell a $7.5 billion stake to the Abu Dhabi government, restoring some confidence in battered U.S. banks.
The dollar initially rallied after the largest U.S. bank said it would sell a stake to the investment arm of the Abu Dhabi government, providing funds to one of the banks hardest hit by the global credit crunch.
Investors interpreted Citi's move as a sign that financial institutions were repairing the damage from a meltdown in the U.S. subprime mortgage market and the resulting credit crunch, which has been a big factor behind recent dollar weakness.
"The market right now is trading on the Citigroup news but there is still a lot more uncertainty out there," said Brian Taylor, senior currency trader at M&T Bank in Buffalo, New York. "Money is moving back and forth with no conviction on any level."
The dollar pulled away from a 2-1/2-year low against the yen touched on Monday to trade at 108.11 in early New York trade, having climbed as high as 108.80, according to Reuters data. The yen fell broadly as news of the Citi stake sale prompted a recovery in the Nikkei share index, warming demand for risky carry trades.
But as traders reached their desks for the New York session, colder realities prevailed with the dollar giving back most of its early gains against the euro and sterling.
"The willingness of a major Gulf investor to take an equity stake in a U.S. financial institution is clearly comforting for U.S. markets and current account financing concerns in that it suggests that longer-term oriented investors with ample cash resources are beginning to see value in depressed U.S. financial assets," said Credit Suisse in a note to clients. "However, we continue to think it is too soon to look for a significant dollar recovery."
The dollar rose 0.3 percent against the Swiss franc at 1.0997 after climbing as high as 1.1024. Sterling/dollar was down 0.1 percent at 2.0697 after an early high of $2.0757.
The euro fell 0.1 percent percent on the day to trade at $1.4865 , around a cent below last week's record highs, in a seesaw session following a stronger-than-expected reading of Germany's Ifo survey. Earlier it traded as low as $1.4816.
German Finance Minister Peer Steinbrueck said Tuesday he expected the economic upturn in the euro zone's largest economy to continue in 2008 despite the strong euro.
Nonetheless there are signs that the euro's exchange rate is starting to approach levels which could worry policymakers.
ECB Governing Council member Nicholas Garganas told Reuters on Tuesday that recent euro gains versus the dollar have been "sharp and abrupt" and that such currency moves are not desirable.
"Although we stick to our view that ... a test of the $1.50 level (in euro/dollar) is just a matter of time, the increasing number of such official comments and the acknowledgement that growth in the euro zone could weaken, could at least dampen the euro's surge or cause a correction lower," Commerzbank Corporates & Markets said in a research note.
U.S. data on Tuesday had little impact on currency markets.
The dollar pared gains against the yen but then recovered after a report showed U.S. consumer confidence fell for the fourth straight month in November to its lowest level in two years on concerns about rising gas prices.
The S&P/Case-Shiller National Home Price Index report showing prices of existing U.S. single-family homes slumped 4.5 percent in the third quarter from a year earlier had no impact on currency markets.