Dollar rallies from 7-1/2 month low; commodity currencies rise

The U.S. dollar notes
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The dollar rebounded from a more than seven-month low against a basket of currencies on Tuesday, led by gains versus the safe-haven yen, as investors' appetite for risk and higher-yielding assets improved with the rise in oil prices.

Gains in oil also drove a rally in commodity-linked currencies such as the Australian and Canadian dollars.

"It's a commodity kind of day," said John Doyle, director of markets at Tempus Consulting in Washington.

"Oil is now more than 50 percent stronger than it was at its low in February. That's boosting general sentiment overall and with that we're seeing a rally in commodity currencies such as the Canadian dollar, which is about 30 percent higher now from its low in January."

Good, bad, and ugly of stronger yen
Good, bad, and ugly of stronger yen

The U.S. dollar, meanwhile, has generally benefited from the improvement in risk appetite especially against the safe-haven currencies such as the yen and Swiss franc. But the dollar's outlook remains tied to U.S. interest rate expectations.

The greenback has been independently weaker for the last few weeks, with the dollar index losing nearly five percent so far this year, as investors have pushed back their expectations for when the Federal Reserve will next raise U.S. interest rates his year.

Fed funds futures imply barely one quarter point increase for the whole of 2016, with only about a 20 percent chance of a hike in June priced in.

The dollar index, which measures the greenback against a basket of six major currencies, fell to as low as 93.627, its lowest since August. It was last at 93.99, up 0.1 percent.

Rabobank currency strategist Jane Foley in London said the dollar's recent sell-off looked a little "overdone."

The dollar strengthened 0.6 percent versus the yen to 108.53 yen, having hit a 1-1/2-year low of 107.64 on Monday. The yen in the first three months of the year posted its strongest quarter since late 2009.

Those gains prompted Japanese officials to warn on Monday that the yen moves were "one-sided and speculative" and that the government stood ready to intervene to weaken the currency.

But with oil prices hitting a 2016 high above $43 per barrel on Tuesday and risk appetite on the rise, the yen needed no such intervention.

The euro, meanwhile, fell 0.2 percent against the dollar to $1.1391, after earlier hitting a six-month high of $1.1464.

The Australian dollar rose 1.25 percent to US$0.7684, while the New Zealand dollar gained 0.9 percent to US$0.6917.