Dollar Rally Pauses as Investors Take Profits

A rally in the U.S. dollar stalled and the currency was little changed against the euro on Tuesday as some investors sold the greenback to lock in profits after it touched multi-month highs.

The dollar has rallied more than 4 percent against the euro this month with help from a sell-off in oil prices and growing fears economies elsewhere may slow at a faster pace than in the United States.

The euro slid to a six-month low against the dollar earlier after breaking a series of key chart levels, convincing some analysts that the greenback may be ending its seven-year slide.

Still, demand for the U.S. currency waned on Tuesday and investors shrugged off data showing the U.S. trade deficit unexpectedly shrank in June.

"The dollar rally has temporarily stalled with players looking to take profit on recent out-sized moves," said Michael Woolfolk, a senior currency strategist at The Bank of New York Mellon. "The trade report had limited impact on the dollar as the greenback came under pressure earlier from a rebound in crude oil prices."

Oil prices fluctuated on Tuesday, but last traded down 1.5 percent at $112.64 per barrel, after dropping more than $30 since a a record high hit in July. Fears of rising oil prices had been weighing on the outlook for the U.S. economy.

"The correlation between crude oil prices and the dollar is overwhelming the impact of economic fundamentals for the time being," added Woolfolk.

The European currency

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[EUR-TN  Loading...      ()   ] was little changed, up less than 0.1 percent, after earlier touching a six-month low of $1.4814, according to Reuters data.

"Dollar profit-taking is in vogue at the moment," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey. "Relatively minimal dollar reaction on an outright positive trade deficit report suggests a dollar top might be in place (for now)."

The Russian ruble was one of the biggest gainers versus the dollar on Tuesday. The gain in the ruble came as Russia ordered a halt to military operations in Georgia on Tuesday.

The ruble was last 0.8 percent higher at 24.2481 to the dollar, and on track for its best one-day gain since May 2008.

The dollar index , which measures the greenback against a basket of six currencies, was also little changed after hitting a six-month high earlier in the session. It was last up less than 0.1 percent at 76.276, having hit 76.616 earlier. The index had surged more than 4 percent this month.

The dollar was below 110 yen

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[JPY-TN  Loading...      ()   ], within sight of a seven-month peak of 110.40 hit on the EBS trading platform the previous day. The euro fell against the Japanese yen

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[$$EURJPY  Loading...      ()   ] to trade about 0.3 percent lower.

Dollar Not Without Risks

The U.S. economy is still ailing, with the financial sector reeling from a year-old credit crisis, but analysts say the outlook elsewhere in the world has buoyed the dollar's position.

The euro area and Britain have buckled under the twin strains of higher inflation and fading growth. European Central Bank President Jean-Claude Trichet said last week the euro zone economy was slowing more than policy-makers had expected.

"We are witnessing the entry of sustainable flows into the dollar," Benedikt Germanier, a currency strategist at UBS AG said in a note. "As growth rates continue to worsen, the dollar will continue to firm towards our pre-existing 1.40 forecast."

Data on Tuesday showed the U.S. trade deficit shrank unexpectedly in June to $56.8 billion, down from a revised $59.2 billion in May.

Dustin Reid, a senior currency strategist at ABN Amro in Chicago, said a brief rally in the dollar following news of the narrower trade gap in June may have provided an opportunity to sell the currency.

"There might be some people just trying to get out of recently established long dollar positions on the back of stronger-than-expected data," he said.