Dollar Rally Fades as Investors Take Profits

The dollar fell against the euro on Tuesday, after earlier hitting a two-week high, as traders stepped in to buy back the common currency at cheaper levels.

Dollar and Euro
Dollar and Euro

That arrested a two-day dollar rally, sparked by a growing view that last week's better-than-expected employment data would keep the Federal Reserve from cutting interest rates later this month.

The euro slipped as low as $1.4016 on Tuesday, well off a record high near $1.43 hit last week, before bouncing back.

"There's still very good interest to buy euros at lower levels, and a lot of big players are trying to catch the market leaning," said John McCarthy, director of foreign exchange at ING Capital Markets in New York.

The Fed cut rates by half a percentage point in September to shield the economy from worsening housing and credit crises, but the jobs report sparked greater expectations that the central bank may stick to the sidelines when it next meets to consider rates on Oct. 31.

Futures markets now see about a 40 percent chance of a Fed rate cut this month, down from around 75 percent last Thursday, the day before the jobs report.

The euro was up 0.3 percent at $1.4091 Tuesday afternoon. Earlier, it slipped to $1.4016, its lowest level since Sept. 20, according to Reuters data. The dollar slipped about 0.5 percent against the yen .

Analysts were also awaiting the release of the minutes of the Fed's Sept. 18 meeting later on Tuesday for further clues as to the central bank's next move.

"A lot of people now think the Fed is going to need more evidence of a weak economy before it lowers rates again," said Tu Packard, senior economist at Moody's in West Chester, Pa.

Also buffeting the euro in recent days have been complaints from European officials who fear the currency's rise against the dollar threatens to undermine the euro-zone economy.

That has led markets to brace for finance officials from the Group of Seven richest countries to call for a stronger dollar when they meet next week in Washington.

"Seeing finance ministers pile on and complain about the strong euro has caused some people who were long euros at the currency's all-time high to rethink their strategy, at least ahead of the meeting," said Andy Busch, global currency strategist at BMO Capital Markets in Chicago.

But on Monday, euro-zone finance ministers ended a meeting by calling on China to let the yuan appreciate to help solve exchange rate imbalances, echoing the U.S. position.

"That might be a bit of a reason why we've seen the euro come back a bit, as they talked about the yuan and refrained from saying too much on the dollar," McCarthy said. He added there is still "an incredible and ongoing appetite for euros that doesn't have much interest in short-term trends."

Greg Salvaggio, senior currency trader at Tempus Consulting in Washington, said traders are likely to buy the euro on dips with the view of taking the currency back near its record high just shy of $1.43 touched last week.