Dollar Slips, Euro Rebounds Following Selloff

First Published Tuesday, 5th February 2013 07:33 pm - © 2013 Dow Jones


By Wallace Witkowski and William L. Watts, MarketWatch

SAN FRANCISCO (MarketWatch) -- The U.S. dollar shed gains Tuesday with the euro rebounding in the wake of improved European manufacturing drop after the prior session's drop on concerns about political stability in Spain and Italy.

The ICE dollar index (DXY) which measures the greenback against a basket of six major global currencies, traded at 79.475, down from 79.589 in North America late on Monday.

The euro (EURUSD) traded at $1.3585, up from $1.3511 late Monday after recovering from a slide below the $1.35 level in Asian trade.

The euro fell prey to a bout of apparent profit-taking Monday as Spain's main opposition party called on Prime Minister Mariano Rajoy to resign amid allegations that his party accepted secret payments. Rajoy denied wrongdoing.

Reports that former Italian Prime Minister Silvio Berlusconi was gaining ground ahead of elections in the country also weighed on the currency on Monday, pushing up Spanish and Italian bond yields. The specter of renewed political turmoil in the euro zone spooked U.S. investors, contributing to declines on Wall Street Monday.

"Concerns about Spanish politics served as a good excuse for a bout of profit-taking Monday across many markets," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman, in a morning note. "To us, the corruption allegations appear to be mere noise, but instead we note that confidence in the Rajoy government has been eroding as the economy deteriorates."

The euro gained ground in the wake of final January purchasing-managers' index readings. The composite reading for the euro-zone came in above an earlier "flash estimate," indicating that private-sector activity across the region shrank at the slowest pace in 10 months. .

The shared currency also gained ground despite French President François Hollande offering the most high-profile complaint yet about the strength of the euro.

Hollande told European Union lawmakers in Strasbourg, France, that the euro shouldn't be left to fluctuate according to the market's mood. He called for the establishment of a foreign-exchange rate policy to protect the currency from "irrational movements," news reports said, marking the most high-profile complaint yet about the strength of the shared currency.

Hollande's comments "would carry more weight if they were echoed by the [European Central Bank]," said Adam Cole, currency strategist at RBC Captial Markets. "So far, the ECB has steered clear of commenting on euro appreciation, but we are alert to the risk that it [might come up] in the post-ECB press conference Q&A" on Thursday.

That marks a potential downside risk for the currency, he said.

Against the Japanese unit (EURJPY), the euro fetched Yen126.68, compared with Yen124.75.

Italian and Spanish bond yields fell back on Tuesday, while the euro and European stocks rallied and U.S. stock-index futures pointed to a Wall Street rebound. .

"Caution will prevail in the near term as markets begin to question the veracity of the rally in risk assets registered over recent weeks," said Mitul Kotecha, global head of foreign-exchange strategy at Crédit Agricole.

The dollar (USDJPY) traded at Yen93.27, up from Yen92.30 in North American trading on Monday.

Elsewhere in the region, the Australian dollar fell after the country's central bank on Tuesday left its benchmark interest rate at 3%, as was widely expected, and said an accommodative stance of monetary policy was appropriate.

The Aussie dollar (AUDUSD) was changing hands for $1.0410, down from $1.0439.

The British pound (GBPUSD) was at $1.5655, compared with $1.5767 in New York.

The WSJ dollar index , a gauge of the U.S. currency's moves against a slightly wider basket than that used by the ICE index, rose to 71.07 from 70.99.

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