Dollar Edges Down on US Economic Concerns

The dollar slipped against most currencies Tuesday, resuming a long-term decline after a brief respite on Monday as investors expected further signs of housing weakness and sluggish consumer spending that could hurt U.S. growth.

Dollar and Yen
Dollar and Yen

The dollar was higher against the yen, however. The yen fell from an 18-month high against the dollar after comments from Japan's prime minister abruptly ended the unwinding of carry trades that had pushed the yen higher in recent days.

Prime Minister Yasuo Fukuda told a newspaper that the yen was appreciating "too fast" and speculators needed to "be careful" to avoid the possibility of intervention. Prior to that, dealers had been rapidly reducing their risky trades, increasing volatility in the currency and equity markets.

For the moment, the rapid ratcheting down of risk appeared to be over and the market continued to maintain bets against dollar strength, though they have shrunk since last week.

"We are still confident of the general trend toward dollar weakness and view commodity currencies like the Australian dollar and Canadian dollar as attractive means of playing for a return of risk-taking," said Divyang Shah, chief strategist with Commonwealth Bank in London.

The euro edged up against the dollar from late Monday, partly lifted by a more than 1 percent rise against the yen .

The euro was only a few cents away from last week's record high of $1.4752, according to Reuters data. The New York Board of Trade's dollar index was down 0.2 percent to 75.70.

The dollar was up versus the yen after falling as low as 109.10 yen on Monday.

"There's still a huge proportion of the market that is short the dollar and that seems to be the way to go," said Robert Houck, a currency dealer with Wells Fargo in Minneapolis. "When it isn't, it's going to unwind in dramatic fashion."

Worries about the U.S. economy continued to drive trade.

Later on Tuesday, the National Association of Realtors will release its September U.S. pending home sales index. Economists expect the index fell 2.8 percent in September, compared with a 6.5 percent fall in August.

On Wednesday, the U.S. government will release its October retail sales report, which will be scrutinized for any sign that weakness in the housing sector is hurting consumer spending.

U.S. interest rate futures still fully expect the Federal Reserve to cut rates a quarter percentage point to 4.25 percent next month.

The low-yielding yen had surged in recent days as renewed fears that credit-related problems could spread to the wider U.S. economy sapped risk appetite among investors, prompting them to buy back yen they had sold to fund purchases of higher-return currencies.

Though comments from Japan's Fukuda ended up providing a bit of shock therapy to get the market back to familiar trends of dollar weakness and strength in commodity-related currencies, risk-taking was tentative.

"Risk reduction preceding any visible sign of slowdown in emerging markets or the commodity bloc is reflecting investor unease over growth prospects in general," said UBS currency strategists in a note.

The Australian dollar jumped against the greenback after tumbling 3.9 percent on Monday. The New Zealand dollar rose versus the U.S. currency.

The comeback in the Canadian dollar was not as definitive after having its largest daily decline since 1971 on Monday.

The U.S. dollar fell against the loonie.