The high-yielding Australian and New Zealand dollars climbed Tuesday, as gains in global equities and commodities bolstered investor appetite for risky trades, outweighing worries about the health of the financial sector.
The Aussie rose to three-month highs versus the greenback, after minutes from the Reserve Bank of Australia's February policy meeting cemented expectations for more interest rate hikes, boosting the currency's appeal to global investors.
The yen, meanwhile, had gained overnight on a brief bout of risk aversion following news about write-downs on risky assets from Barclays Plc and Credit Suisse. But a rally in U.S. stocks, led by energy shares, took the steam out of the Japanese currency's rally.
Further bolstering the latest increase in risk appetite was the surge in commodity prices, analysts said. Platinum hit a record high, while gold climbed, and oil gained nearly $3 on the day.
"Ultimately, we're seeing risk being taken again and that's why you're seeing the Dow up. You're seeing some yen crosses trading softer that has parlayed into a nice equity move," said Joe Francomano, vice president of foreign exchange trading at Erste Bank in New York.
"We're also hearing about sovereign wealth funds out of the Middle East stepping up and investing in the U.S. equity market. Maybe the market is looking at this and saying we have deteriorated for so long that perhaps we have seen the bottom and we're beginning to see the beginning of a bounce," he added.
The Aussie dollar rose as high as US$0.9237, a level last seen in early November.
Minutes from the RBA's Feb. 5 policy meeting showed the central bank had debated a more aggressive 50 basis point rate hike. While the RBA decided in the end on a more modest 25 basis point rise in the cash rate to an 11-year high of 7 percent, the minutes pointed strongly to further monetary tightening ahead.
The New Zealand dollar rode on the coattails of the Aussie's rally, its highest level since July.
The U.S. dollar was down against a basket of major currencies, and slid against the yen.
Keeping investors cautious, Credit Suisse said it has written $2.85 billion off the value of its asset-backed investments, while Barclays Plc, Britain's third largest bank, raised its 2007 write-down on the value of risky assets to 1.6 billion pounds ($3.1 billion).
"All of that still plays out concerns about the health of the financial sector in the wake of the credit crisis," said Omer Esiner, market analyst at Ruesch International in Washington.
The euro rose to two-week highs of $1.4757, according to Reuters data, and remained up on the day. The single European currency edged lower versus the yen, well off a three-week high set earlier.
The Japanese currency was also benefiting from talk of a Chinese interest rate hike after data on Tuesday showed a surge in Chinese consumer inflation to an 11-year high.
Later in the session, investors will look to the NAHB/Wells Fargo Housing Market index, due at 1 p.m., for clues about the state of the housing sector.
The report is expected to show that home-builder sentiment for February was unchanged from January. A weak reading, along with figures on U.S. housing starts later in the week, could bolster the view a slumping housing sector could raise the risk of a recession, a further negative for the dollar.