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Dollar Slips on Fannie Results; Risk Appetite Drops

The dollar extended declines against the euro and a basket of six major currencies for a second day Tuesday after earnings results from Fannie Mae came in weaker than expected.

Dollar and Euro
Dollar and Euro

Fannie Mae, the largest provider of U.S. home financing, reported its third straight quarterly loss as the U.S. housing crisis took another turn for the worse in the first quarter.

Problems at Fannie Mae remind investors that problems in the U.S. housing market, one reason for the slowdown in the U.S. economy, may not yet have completely worked their way through the system and bode ill for the dollar.

"The U.S. dollar is broadly lower on an aggregate basis versus Monday's North American close as weak earnings news in the US housing sector once again has the market moving towards risk averse style trading," Dustin Reid, director, G11 FX Strategy at ABN Amro in Chicago said in a note to clients.

The euro traded higher against the dollar, while the dollar index fell slightly.

The dollar also dropped versus the yen .

The dollar was already lower Tuesday, pressured by waning risk appetite as European equities fell, while the single currency drew support from euro zone service sector data that was slightly stronger than expected.

Concerns over the impact of rising inflationary pressures amid soaring food and energy prices was also reflected in crude oil's surge above $120 to a record high .

More bad news from the banking sector weighed on risk appetite as European shares fell, led by Swiss bank UBS after it unveiled large job cuts.

Reinsurer Swiss Re announced another round of credit writedowns and said its first-quarter net profit had halved, missing analysts' forecasts.

Meanwhile, data released earlier showed a pick up in euro zone service sector growth, with the RBS/NTC services PMI coming in at 52.0, slightly above a flash reading of 51.8.

"European equity markets have been a bit disappointing.

We're seeing a little bit of an increase in risk aversion with the investment community rotating back into the cyclically defensive currencies -- so we've seen the Swiss franc, the yen and euro all rallying today," JP Morgan G10 strategist Kamal Sharma said.

"Also we had the PMI services numbers that give credence to the view that the euro zone economy is slowing but holding up pretty well in the face of downside risks to global economic growth," he added.

The Australian dollar was little changed at $0.9456 , having retreated from a two-week high after the Reserve Bank of Australia held its key cash rate at a 12-year high of 7.25 percent and underlined its concern about demand.

Record high oil prices were seen reinforcing the European Central Bank's focus on inflation, which President Jean-Claude Trichet on Monday termed a "significant" risk.

This underlined expectations the central bank would keep rates at 4 percent when it meets on Thursday.

Analysts also broadly expected the ECB to stick with its hawkish line on inflation in Trichet's post-meeting briefing on Thursday, despite a recent run of soft data, but some felt a psychological change in perceptions was already underway.

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