Dollar Loses as Stock Gains Give Rise to Risk

The dollar slid against the euro and a basket of currencies Tuesday as a stock market rebound encouraged investors to emerge from the shelter of U.S. assets.

U.S. and European stocks rose, which weighed on the yen, although investors remained cautious as they braced for dramatic interest rate cuts later in the week.

The U.S. and Japanese currencies have found support in recent months, with investors reducing exposure to riskier assets financed by cheap yen and dollar loans. U.S. portfolio investors have also moved funds back to their domestic market, which has also boosted the greenback since August.

An unexpectedly bold 100 basis-point rate cut from the Reserve Bank of Australia had earlier kept the Australian dollar under pressure, although the currency has since recovered with the rise in stocks.

"The pro-active approach by central banks to monetary and fiscal stimulus has helped enhance risk appetite," said Vassili Serebriakov, senior currency strategist at Wells Fargo in New York.

"Even though rate cuts are supposedly negative for currencies in general, in this environment, FX investors tend to reward currencies whose central banks are aggressive in stimulating their economies. So we've seen a reversal of gains in the dollar and yen with the bounce in equities."

In midday New York trading, the euro rose 0.5 percent against the dollar and gained versus the yen as well.

For the Investor:

Get After-the-Bell Dow 30 Quotes

Credit Spreads and Libor Data

Futures and Pre-Market Data

Currency Data

The ICE Futures' dollar index, a gauge of the greenback's value against six other major currencies, weakened 0.6 percent to 86.505.

The dollar rose 0.4 percent against the yen to 93.62. It fell as low as 92.64 yen earlier, the lowest since Oct. 28, according to Reuters data.

Global Rates in Focus

Risk appetite also improved, analysts said, after the Bank of Japan held an emergency policy meeting on Tuesday and announced it will accept a wider range of corporate debt as collateral in money market operations to help unfreeze credit markets.

The BoJ held interest rates steady at 0.3 percent as expected at the meeting.

The Australian dollar rose 0.5 percent versus the greenback , despite a sharp rate cut from the RBA.

The RBA's move has raised expectations other central banks may follow suit with aggressive easing in Britain, the euro zone, Sweden and New Zealand this week to revive their flagging economies.

Such cuts could lend some support to the dollar by dimming the appeal of these higher-yielding currencies, though analysts said a rally in the currencies of countries whose central banks cut rates should not be ruled out.

From 'Fast Money':

• Are US Stocks Trapped in a Range?

That's because aggressive rate cuts would be seen as positive for the struggling British, euro zone and New Zealand economies. "That could be a boon for global risk appetite at the expense of the dollar and yen," said Ashraf Laidi, chief market strategist at CMC Markets in London.

In other currencies, sterling rose 1 percent to $1.5051 despite the view that the Bank of England will slash rates by as much as 100 basis points on Thursday, one month after chopping them by 150 basis points to 3.0 percent.

Also on Thursday, the European Central Bank is seen cutting rates by at least 50 basis points from 3.25 percent and possibly more. Market participants, meanwhile, expect the Reserve Bank of New Zealand to cut rates by 100 basis points or more from 6.5 percent.

Copyright 2008 Reuters. Click for restrictions.