The dollar tumbled against the yen and Swiss franc for the second consecutive day as soft U.S. retail sales data combined with concerns about the housing sector made investors shun risk.
Unlike Monday's strength in currencies with low interest rates and broad weakness in the dollar, Tuesday's price action was encouraged by weaker-than-expected economic data as well as
falling Treasury deb yields.
Retail sales grew in February, the U.S. government said, but did not rise as much as economists had forecast.
"This is not a dollar-friendly number, and the reaction in the market reflects that," said Kathy Lien, chief strategist with Forex Capital Markets in New York.
"Weaker consumer spending at a time when the subprime lending sector is in disarray could compel the Federal Reserve to cut (interest) rates in August," Lien said.
The dollar was down 0.7% versus the yen, more than 1 yen away from a three-month low plumbed a week ago during a shakeout in carry trades, in which investors borrow in cheap currencies such as the yen to buy higher-yielding assets or currencies.
Against the Swiss franc, the dollar fell about 0.3%.
The euro edged up versus the dollar, helped slightly by an unexpectedly strong ZEW survey on investor confidence in Germany.
The euro was down against the Japanese currency, moving further away from February's record high near 160 yen.
Concerns about a rising number of defaults in the U.S. subprime mortgage sector and their potential impact on the economy have weighed on U.S. equities and Treasury yields -- in
turn triggering buying of yen and Swiss francs.
The yen in particular for the last several weeks has been closely tied to moves in global equity indexes: weak stocks have meant a stronger yen and vice versa.
Currency analysts with BNP Paribas said the relationship made sense since low yen borrowing costs made it easy for equity investors to leverage their trades, and therefore the market should be prepared for more yen strength and equity weakness.
"Equities will come under pressure on the back of a higher yen and at this point a vicious circle might set in as declining share prices underline risk appetite," they said in a note.
The dollar has indeed fallen against the yen and Swiss franc so far this week, resuming the carry trade unwind that began two weeks ago. But this time the greenback is also
declining against other major currencies such as the euro and sterling.
And increased expectations for rate cuts by the Federal Reserve are not helping the dollar. The implied U.S. interest rate, according to the December 2007 eurodollar contract, has fallen 20 basis points to 4.80% in the last two weeks.