Published: Monday, 26 Oct 2009 | 11:17 PM ET

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The U.S. dollar held a firmer tone on Tuesday, pulling away from recent 14-month lows, as investors unwound short positions and took profits in high-yielding currencies after a sharp drop in stocks and commodities.

The VIX indicator, Wall Street's favourite barometer of market volatility, jumped 9.16 percent on Monday, highlighting how skittish sentiment had become towards stocks and other riskier assets like growth-linked currencies.

The U.S. dollar, seen as a safe-haven when doubts about a global recovery emerge, traded firm around the 76 mark against a basket of currencies. The index posted its best daily gain since September on Monday, pulling further away from a 14-month low of 74.94 on Oct. 21.

"The unwinding in short U.S. dollar positions has a bit more to run," said Anthony Gray, head of risk solutions department at Travelex in Sydney. "The correction in the euro and the Aussie were long due given the stretched long positions."

Analysts said the heavy short positioning on the U.S. dollar had made many investors hesitant to sell the greenback despite the economy's weak fundamentals.

Data late last week showed currency speculators increased their bets against the U.S. dollar in the week to Oct. 20 with the value of net short positions rising to $18.65 billion from $17.99 billion a week earlier.

Investors are likely to stay wary ahead of U.S. consumer confidence numbers for October and house price index data for August, both due later in the day. Also, some wariness among traders is likely to prevail ahead of third-quarter U.S. gross domestic product (GDP) data on Thursday.

Analysts expect the U.S. economy to expand 3.3 percent in the third quarter. Anything lower, like the shock GDP numbers from the UK late last week, could trigger another wave of selling in riskier assets.

The euro edged lower to $1.4864, from $1.4872 late in New York on Monday, when it shed 0.85 percent. The euro peaked on Monday in Asia at $1.5064 after a report from China suggested the Asian giant should increase the share of the euro and yen holdings in its foreign exchange reserve stockpile.

The author of the report later told Reuters he was not speaking for the People's Bank of China, helping the U.S. dollar to rebound.

Chartists expect support at $1.4830 for the euro and a break of that level could see it ease to as low at $1.4675.

The U.S. dollar was also firmer on the yen, inching up to 92.25 yen from 92.16 late on Monday in New York. Traders expect the Japanese currency to stay on the defensive on the back of a rise in yields on U.S. Treasuries.

Yields on Treasuries have risen in recent sessions due to record issuances this week and on speculation the Federal Reserve may change its tenor to a slightly more hawkish bias.

The Australian dollar edged up from a low of $0.9125 on good support from buyers around that level. It is likely to be supported amid lingering speculation on whether rates will move up by 25 or 50 basis points next month.

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