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Dollar Stronger on Risk-Off Trade

The dollar rose Tuesday as global investors became more risk-averse and sought out safe havens.

By Joe Manimbo of Travelex

NEW YORK (

TheStreet

) -- The dollar rose broadly on Tuesday, finding support from weaker global stocks, which boosted the buck's safe-haven appeal.

After rising Monday, world equities and other riskier assets (including commodities and currencies such as the Australian and Canadian dollars) fell as investors reconsidered the impact of China's pledge to let the yuan strengthen.

The Chinese central bank's decision to loosen its grip on its currency, also known as the renminbi, is a good initial step to help correct the global imbalances that have been a key source of political tension between Washington and Beijing.

Still, any appreciation in China's currency is expected to be only gradual and not likely enough to meaningfully correct the global trade imbalances that were brought on by a weak yuan, which makes Chinese exports less expensive.

The euro retreated from a one-month high Monday, hurt by the reduction in risk appetite and by news late Monday that Fitch downgraded

BNP Paribas

, France's biggest bank, by a notch to AA-. The more risk-averse environment overshadowed news that German business sentiment rose to a two-year high in June.

The Canadian dollar rose on tame inflation data. Canadian consumer prices fell in May from a month earlier. Still, the inflation figures were slightly above forecast. The Canadian currency on Monday rose to its highest level since mid-May against its U.S. rival.

On Tuesday, the

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Fed

begins a two-day policy meeting. No change to U.S. interest rates is expected.

EUR

: The euro retreated from yesterday's one-month high against the dollar. The single currency was largely pulled down by the decline in market sentiment as investors reconsidered the impact of China's weekend decision to allow its currency to appreciate against the buck.

The euro was also hurt by news late Monday that credit ratings agency Fitch had downgraded BNP Paribas -- France's largest bank -- by one notch to AA-, citing a decline in the quality of the bank's assets.

Fitch did, however, maintain its stable outlook for the French banking giant. The risk-averse theme helped to eclipse generally upbeat news on German business sentiment. The Ifo index of corporate sentiment in the eurozone's largest economy rose more than expected to 101.8 in May from 101.5 the previous month. Investors had expected a reading of 101.2 in May. The better-than-expected report allayed fears that the continent's debt problems were dramatically hurting the bloc's core economies.

CNY

: The rise in market optimism that accompanied China's weekend decision to gradually allow its currency to rise against the dollar faded, which dampened investor appetite for riskier assets.

The shift in China's currency policy toward a modestly looser one initially boosted risk sentiment. However, market enthusiasm dissipated Tuesday as investors reconsidered the impact of China's actions. For one, any appreciation in the yuan is only expected to be gradual and not enough to significantly reduce the global trade imbalances that were seen as being caused by a weak Chinese currency. The move was also viewed by many as an attempt by Chinese officials to cool some of the political tensions between Washington and Beijing ahead of a Group of 20 meeting of world leaders on Saturday and Sunday in Toronto, Canada.

GBP

: The U.K. this morning was expected to announce the biggest government spending cuts in a generation to help get public finances in order. Although the new coalition government's emergency budget should put the U.K. on more solid fiscal ground, fears remain that the tough expected austerity measures to reduce Britain's public deficits will come at the cost of weaker growth. The outlook for weaker growth in the U.K. suggests that local interest rates will remain on hold for a longer period to time, which would undermine the pound's yield allure.

CAD

: The Canadian currency slipped off Monday's mid-May peak against the dollar as a more depressed level of risk sentiment weighed on the loonie. Nevertheless, the currency found some footing following data this morning that showed relatively tame price pressures. The Canadian consumer price index held steady at 0.3% on the month in May, which was slightly above the 0.2% forecast. On an annual basis, the CPI rose 1.4% in May, down from the 1.8% reading in April but above the 1.3 forecast for last month. Core prices, which exclude volatile food and energy prices, rose 1.8% in May from 1.9% last time. The data suggested the Bank of Canada has some flexibility as it considers the timing of its next policy change.