The dollar slipped against the euro and edged up against the yen Monday as investors waited to see how major central banks at policy meetings this week will respond to a potential global economic slowdown.
The Reserve Bank of Australia, the Bank of England and the European Central Bank are all due to meet and dealers will be focusing on whether they are concerned about the severity of the U.S. slowdown and whether it will affect their economies.
If all those banks warn about slowing conditions down the road, then investors' willingness to take risks could suffer, hurting higher-yielding currencies such as the Australian dollar and helping low-yielding units like the yen.
"The Australian dollar, New Zealand dollar and sterling have all rallied on the improved outlook for leveraged trades, though the Australian dollar may be the only currency to sustain the move higher as the Reserve Bank of Australia will likely be the only central bank to follow the market's expectations with another rate hike," said Mark Frey, chief dealer with Custom House in Victoria, British Columbia.
By mid afternoon, the euro climbed 0.2 percent to $1.4835, largely driven by gains in the euro against the yen and profit taking on the dollar's burst of strength on Friday.
The dollar ticked up 0.1 percent to 106.76 yen.
The Australian dollar rose 0.4 percent to US$0.9080 after earlier touching a two-month high of US$0.9100.
The British pound gained 0.5 percent to $1.9753.
Uncertainty continued to rule the U.S. dollar after it was whipsawed last week by another hefty interest rate cut from the Federal Reserve, weak data on U.S. growth and jobs and a surprisingly robust manufacturing report.
For now investors were not letting that uncertainty stop them from keeping their carry trades, in which a low-yielding currency such as the yen is borrowed in order to buy higher-yielding assets in other currencies.
"There's some appetite out there for carry trades," said Andrew Busch, a global foreign exchange strategist at Bank of Montreal in Chicago. "Unless we see really negative news or stocks plunging, people will still favor carry trades."
Euro Bears Awakening?
Since the credit crisis flared up last summer, European Central Bank officials have kept their focus on containing inflation and played down the risk of a growth slowdown.
However, some analysts do not think that the euro zone can escape from the knock-on effects of the slowing U.S. economy.
"The increased depth and breadth of the U.S. slowdown spells trouble for major economies and strains in the euro area may become more evident," said CitiFX strategists in a note.
"Given the surprising degree of ECB hawkishness and the potential for relatively sharp declines in euro area yields, there is risk that catch-up may trigger a short-term correction from euro/dollar," they said.
The RBA is expected to raise Australian rates this week, while the ECB is expected to keep rates on hold and the Bank of England will likely lower borrowing costs. Sterling firmed broadly in a snap-back from heavy selling Friday.
The Fed has already slashed its benchmark interest rate by 1.25 percentage points in the last two weeks, the biggest move in that timeframe since the U.S. central bank began using the fed funds rate as its primary policy tool in the early 1990s.