The dollar fell against the euro on Tuesday as data showing a sharp improvement in German investor confidence lifted stocks and helped the European common currency rebound from a recent one-month low.
Uncertainty surrounding the European Central Bank's next policy move and an International Monetary Fund report warning that asset writedowns at global banks may exceed $4 trillion limited the euro's gains, though, and kept investors on edge.
In mid-afternoon trade, the euro was up 0.3 percent at $1.2955 after hitting a one-month low of $1.2883 on Monday. Germany's ZEW survey of investor sentiment rose to 13.0 this month from -3.5, the first positive reading since 2007.
The euro also rose 0.7 percent to 127.80 yen , while the dollar added 0.7 percent to 98.65 yen . The yen tends to struggle when investor risk appetite increases, and it's also been hurt by news of Japan's weakening economy.
"We got a euro bounce after ZEW and there's consolidation after a horrible day yesterday in stocks, but my view is this is an opportunity to sell euros," said T.J. Marta, chief market strategist at Marta on the Markets in Scotch Plains, New Jersey.
Analysts said an IMF report that banks worldwide will have to write down assets by $4.1 trillion to restore global stability suggests the financial crisis is far from over, which will boost safe-haven demand for the dollar. For more see[ID:nN21456999].
Euro gains are likely to be limited by uncertainty about what unconventional policy steps, if any, the ECB takes to combat a euro zone recession, analysts said.
The ECB is expected to cut interest rates from 1.25 percent to 1 percent in May, but it's unclear whether it will follow the Federal Reserve and other central banks and create money via other means such as buying corporate or sovereign debt.
Either way, Marta said the euro is likely to suffer. "If the ECB comes together on quantitative easing, the euro will go down because the U.S. has already started," he said. "If they don't, the euro will be punished because the ECB will be accused of not reacting to the crisis."
Quantitative easing is the process of flooding the banking system with money when interest rates are already at or near zero in order to stimulate growth and boost lending.The Bank of Canada on Tuesday cut rates to 0.25 percent, an all-time low, and said it will outline on Thursday its strategy for possible nonconventional measures
Euro up on German investor data, worries remain
