Dollar skids to a 5-month low against the yen as risk appetite returns to markets

  • The greenback was down about 0.5 percent for the session against a basket of international currencies.
  • The recent announcements on tax cuts and on infrastructure plans in the U.S. have also been interpreted as negative for the dollar.
  • Market players will be watching for new consumer price data due Wednesday in the U.S.

The U.S. dollar hit a five-month low against the yen Tuesday morning as risk appetite grew among global investors.

The greenback was down about 0.5 percent for the session against a basket of international currencies. Market participants have started to edge money back into perceived riskier assets, like stocks, signaling that fears seen last week during the sell-off have dissipated, for now.

"The USD is in a structural, medium-term downtrend. Part of the reason for this is the U.S. fiscal account deficit, which is expanding rapidly," Stephen Gallo, European head of forex strategy at Bank of Montreal, told CNBC via email.

The dollar index has depreciated 3 percent since the start of 2018. This has been driven by comments from the U.S. administration that a weak dollar is good for international trade as well as improving economic indicators in other regions, like the euro zone, which has boosted the euro.

The recent announcements on tax cuts and on infrastructure plans in the U.S. have also been interpreted as negative for the dollar, as the U.S. government is set to spend more and widen its fiscal deficit. The currencies of countries with account surpluses — where there is a positive difference between a nation's savings and investments — are traditionally favored by investors than those with deficits.

"But another reason for the downtrend in the USD is that the weak USD and rising risk assets were feeding off one another. That virtuous circle went into reverse last week when equity markets tanked, but so far this week, risk assets have recovered and there are signs that the willingness to hold USDs is waning again," Gallo added.

Global equity markets have been on the rise since Monday recovering from the steep losses seen last week.

Market players will be watching for new consumer price data due Wednesday in the U.S. If the number proves higher than analysts expect, the dollar could gain some ground during that session, as the prospect of the U.S. Federal Reserve tightening its policy at a faster pace would increase.