Dollar Weakens Broadly As Risk Appetite Picks Up

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The dollar weakened substantially on Tuesday, staying near 16-month lows versus a basket of major counterparts as easing fears about the Dubai debt debacle led to risk appetite.

A hectic day of economic developments was headlined by a pair of vastly different interest rate decisions from the Pacific Rim, where Australian central bankers raised rates and policy makers in Japan offered further easing measures.

Here in the US, traders were presented a mixed bag of data on the housing and manufacturing sectors.

The dollar slipped to 1.5100 versus the euro, edging closer to a yearly low of 1.5142 set last week. The gains the dollar enjoyed during the first days of the Dubai crisis have been all but erased.

Meanwhile, the buck failed to make up any ground versus the yen, even after the Bank of Japan voted unanimously to offer about 10 trillion yen ($115.8 billion) in short-term loans to commercial banks. Also, the central bank retained its key rate at near zero.

At the same time the Reserve Bank of Australia raised its key interest rate for a third straight session to 3.75%. In October, Australia became the first G-20 nation to hike its interest rate since the onset of the global financial crisis in late 2008.

The dollar dropped to .9263 versus the aussie, and to a monthly low of C$1.0405 against the petro-linked loonie.

The greenback also hit the skids versus the sterling, plunging 2 cents to 1.6640. The pound came under pressure last week amid concerns about exposure of UK banks to Dubai.

US pending home sales increased for the ninth consecutive month in October to their highest level in well over three years, providing further evidence that the beleaguered housing market may be turning around.

The National Association of Realtors said Tuesday its pending home sales index rose 3.7 percent to 114.1 in October from 110.0 in September, rising to its highest level since March of 2006.

Meanwhile, the Institute for Supply Management released a report on Tuesday showing a continued increase in economic activity in the manufacturing sector in November. However, the pace of growth slowed by more than economists had been expecting.

Helped by the weaker dollar, which makes US products cheaper to foreign buyers, the manufacturing sector is thought to be turning around following the massive slowdown associated with the worst recession in decades.

Also, a high-ranking official of the U.S. central bank suggested Tuesday that the substantial liquidity that has been pumped into the financial system will have to be removed soon so that inflation expectations do not become a problem.

Philadelphia Federal Reserve President Charles Plosser said that the Fed will have to begin tightening monetary policy in order to convince markets that it is serious about keeping inflation in check.

(Market News Provided by RTTNews)