By Frances McInnis Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)–The dollar rose against the euro Tuesday as optimism over possible appreciation of the Chinese yuan faded and worries over the health of Europe’s financial sector kept market sentiment muted.
The pound rallied against the dollar after Fitch Ratings weighed in favorably on the U.K. government’s austerity budget, released earlier Tuesday.
Investors are cautious ahead of Wednesday’s Federal Open Market Committee rate announcement, analysts said. Even though ultra-low rates aren’t expected to change, the Fed’s statement will be scrutinized for any clues as to when monetary policy might tighten.
“The markets are just waiting and biding their time,” said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York. “Investors are waiting to see what is said, then they’ll react,” keeping most currencies in a tight range, he added.
Early Tuesday afternoon, the euro was at $1.2304 from $1.2320 late Monday, according to EBS via CQG. The dollar was at Y90.58 from Y91.04, while the euro was at Y111.46 from Y112.15. The U.K. pound was at $1.4848 from 1.4754. The dollar was at CHF1.1071 from CHF1.1050.
The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 85.887 from 85.953.
Fitch called the U.K. budget a “strong statement of intent.” The U.K. pound gained to its strongest level of the day against the dollar after Fitch delivered its statement, which said the budget could strengthen confidence in the country’s AAA status.
However, uncertainty about the direction of the yuan kept the overriding tone cautious. The People’s Bank of China set the dollar-yuan central parity rate at 6.7980 earlier Tuesday, down from 6.8275 Monday, marking the largest single-day change in recent history. The yuan, however, actually weakened in subsequent trading, damping some market expectations for a steady march higher for the yuan.
“The revaluation of the Chinese yuan appears to have come in with a bang and certainly its impact is limping out with a whimper,” said Andrew Wilkinson, senior market analyst at Interactive Brokers in Greenwich, Conn.
By allowing the yuan to fall on Tuesday unexpectedly against the dollar, China’s central bank appeared to be trying to temper expectations that the Chinese currency is bound to rise, conveying the message that currency-policy reform doesn’t mean one-way bets are a sure thing. Traders said the day’s moves added to uncertainty over the pace and extent of any yuan appreciation in the months ahead.
The uncertainty tended to benefit the dollar and yen over the euro as they function as safe-haven currencies whenever doubt makes traders wary.
Worse-than-expected U.S. existing-home-sales data for May and sinking U.S. equities also tended to drive investors to the perceived safety of the dollar and yen.
Fresh worries over the euro-zone sovereign-debt crisis, and the possibility it will infect the region’s banking system, also dragged down investor sentiment after Monday’s downgrade by Fitch Ratings of French banking giant BNP Paribas.
The euro dropped to fresh record lows against the Swiss franc, where it continued to trade in New York afternoon hours, as investors file into the Swiss currency based on solidly improving Swiss fundamentals and flee the euro over the sovereign-debt worries.
The euro was at CHF1.3594 from CHF1.3695 late Monday after dropping as low as CHF1.3588.
The Swiss currency’s long-running rally has accelerated of late, after the Swiss National Bank last week stepped back from its policy of seeking to hold it down–a stance it reiterated Monday.
-By Frances McInnis, Dow Jones Newswires; 212-416-3417; frances.mcinnis@dowjones.com
(Bradley Davis in New York, Takashi Mochizuki in Tokyo and Katie Martin in London contributed to this article.)
