US dollar rises, sentiment favors interest rate outlook

Getty Images

The U.S. dollar recovered lost ground on Tuesday as trading desks returned to full strength and underlying trends for its continued rise reappeared, although it remains hemmed in to tight ranges by mixed economic data.

A surprising move by the Reserve Bank of Australia not to cut interest rates boosted the Aussie dollar, bucking the prevailing greenback rally.

That rally has stalled in the last month with disappointing U.S. economic data such as last week's weak jobs report underscoring a weak first quarter. Still, expectations for a recovery are putting a floor under the dollar.

"The bigger, broader pieces are that the U.S. economy should still outperform and the Fed is likely to raise interest rates sooner than everyone else. The dollar strength story is still intact, we're just in a pause because the dollar lacks a catalyst to push it to new highs," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.

The dollar recovered the ground it lost from Friday's dismal March employment report against the euro. The euro fell 1.13 percent to a session low $1.08133.

Strong dollar hurts 'Made in America'
Strong dollar hurts 'Made in America'

The dollar index, which measures the greenback against a basket of currencies made up of its major trading partners, rose 1.20 percent to a session high 97.937.

For a second day running the dollar rallied late on what traders describe as thin volumes.

"Perhaps they (investors) shrugged off the nonfarm data and looked at it a little deeper. Maybe they saw underlying factors were good and determined that the report was not something that is continuous or the start of a weakening period," said Bill Samela, co-head of global FX trading at Bank of New York Mellon in New York.

Read MoreStrong dollar puts pressure on 'Made in USA' manufacturers

The dollar rose to its strongest since March 20 against the Japanese yen, hitting a high of 120.45 yen, a gain of 0.77 percent on the day.

The Aussie dollar rose to US$0.7711, its highest in a week, from around US$0.76 before the RBA decision, extending its recovery from a six-year trough of $0.7534 set on Thursday. Its gains faded to US$0.7636, up 0.61 percent on the day.

The RBA policy board noted that while the Aussie had fallen against a strong greenback, the decline against a basket of currencies had been less and a lower exchange rate was needed to help the economy.