Dollar Extends Gains After Beige Book Report

The U.S. dollar extended gains versus the euro Wednesday after the Federal Reserve's Beige Book reported there are signs the recession is easing.

It erased earlier losses suffered after Russia's central bank said it will diversify its currency reserves by cutting U.S. Treasury purchases and buying IMF-backed bonds.

The euro had firmed earlier as investors betting the worst of the global slump was over saw less need to buy dollars as a safe haven, and Russia's warning added to euro gains. But analysts said any Russian plans to diversify away from dollars would take time, partly because the International Monetary Fund bonds the Russians mentioned they would buy instead do not yet exist.

Traders also said the euro's rise to $1.4145 triggered automatic sell orders that pushed it to $1.3952 before moving down to around $1.39 . Also, some analysts said lingering doubts about the strength of any economic recovery capped high-yielding currencies and stocks.

"These are rather violent markets without huge conviction, so when the euro got a bit heavy, people headed for the door," said Firas Askari, head of FX trading at BMO Capital Markets, adding "it pays to be nimble right now."

David Bradley, currency trader at Scotia Capital in Toronto, said the market was "going through one of those phases, with everyone thinking we'd gone too far and deciding to take profits or switch positions."

The dollar rose nearly 1 percent to about 98 yen while sterling retreated from a $1.6473 peak to trade up slightly at near $1.63. Earlier gains came on data showing the first rise in UK industrial output since February 2008.

The U.S. dollar saw a sharp fall against major currencies on Tuesday, after a jump last week in the wake of better than expected U.S. employment data.

Dollar Diversification

Russia's plans to diversify its reserve holdings, detailed ahead of next week's Moscow meeting among heavyweight emerging market countries China, Brazil, India and Russia, sent U.S. Treasury yields higher early Wednesday and initially added to broad-based dollar selling.

Russia holds about 30 percent of its $404.2 billion foreign exchange reserves in Treasurys, making it the fifth largest holder of U.S. government debt. But analysts said Russia's roughly $140 billion in long-dated U.S. Treasurys pales in comparison to the sheer volume of outstanding debt. The Treasury plans to issue some $2 trillion this year alone.

With the U.S. budget deficit expected to hit $1.8 trillion this year and rise further from there, "of course Russia, China, everyone wants to diversify their holdings in the long run," Askari said.

"But they're all long Treasurys and can't just dump them at once," he added. "And for now, the U.S. Treasury market is still the deepest and most liquid available."

More For Investors:

• Credit Spreads and Labor Data
• Futures and Pre-Market Data
• Currency Data

In the Treasury market, the benchmark 10-year note yield rose to 3.92 percent on Wednesday, near its highest level since November, and analysts said this would likely heighten interest in an afternoon auction of $19 billion in 10-year notes.

But Boris Schlossberg, director of FX Research at GFT Forex, said recent auctions have attracted sizable demand despite rising yields and U.S. budget deficit concerns.

"So for the time being, I think (the Russia comments about the dollar) are a tempest in a teapot," he said.

Some analysts said investors' hopes for a global recovery were overdone and could spark a safe-haven dollar rally. "High energy prices could nip recovery in the bud, but markets are not reflecting the reality on the ground," said Forex.com chief strategist Brian Dolan. "We like the dollar from here."

Copyright 2009 Reuters. Click for restrictions.