Daily Forex Overview

Previous session overview

The US dollar fell for a fourth straight session Tuesday as indications the global recession won't get worse led central banks and others to sell U.S. currency they hold as reserves.

As the Dow Jones Industrial Average rose, crude oil prices surged towards $70 a barrel and U.S. housing data Tuesday proved encouraging, investors began betting against the U.S. currency and buying currencies that may be deemed riskier but offer higher yields.

There's also a sense that a return of risk appetite and increased demand for goods and services could send U.S. inflation much higher, making dollars less of a safety bet than previously thought.

The euro climbed as high as $1.4332 intraday, its highest since Dec. 29. The U.K. pound reached $1.6596, a peak unseen since October.

During the past several years, there have been rampant concerns echoed that global central banks may reduce their dollar holdings, to the extent that the greenback could eventually lose its important status as the world's main reserve currency. Data so far haven't shown this to be the case.

A report in late March showed that at the end of 2008, about 64% of countries' foreign exchange reserves were held in dollars, virtually unchanged from the end of the third quarter. The No. 2 reserve currency was the euro, with 27% of the total, on average.

The rising risk appetite that's pushing the dollar lower has come largely on the back of a steady flow of U.S. and global economic data that indicates labor, manufacturing, housing and other sectors are either improving or stabilizing.

The most recent report came Tuesday, when the National Association of Realtors said pending sales of existing U.S. homes in April rose 6.7% - the biggest monthly jump in eight years.

The higher risk appetite also had the effect of causing less widely traded currencies to surge against the dollar. The Colombian peso hit its strongest level since Sept. 22 on Tuesday and has appreciated 27% in the past three months. The dollar traded at COP2,063 Tuesday, down from as high as COP2,613 in early March.

Market expectation

The US dollar declined in Asia Wednesday, hitting a seven-month low against the British pound and an eight-month low versus the Australian dollar, as gains in regional stocks helped lift investor demand for riskier currencies.

Sterling touched $1.6658 during the session, the highest in seven months. The Australian dollar, partly helped by the country's surprisingly strong gross domestic product data, reached $0.8265 - a level unseen since September 29.

The euro also gained versus the U.S. currency.

In early Asian hours, higher Asian shares encouraged short-term players in the region to buy riskier, higher-yielding currencies against the low-yielding U.S. and Japanese units, dealers said. Japan's benchmark Nikkei 225 Stock Average index was up 0.5% at 9754.86 as of 0400 GMT.

Along with the sterling, the euro rose $1.4326 from New York late Tuesday to $1.4330. Traders say it could reach $1.4500 in the near term.

Next on players' agenda is the European Central Bank's planned policy meeting on Thursday. However any impact will probably be muted if the outcome of the meeting is in line with market expectations, dealers said.

The markets anticipate that the ECB will keep its interest rate unchanged, but will release details of its plan to purchase around EUR60 billion in covered bonds.

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