The dollar drifted higher against European currencies on Tuesday, after steep losses in previous sessions, as investors awaited U.S. data to determine how deeply the global credit crunch has affected the economy.
The euro showed little reaction after the German Ifo business confidence report for September came in slightly weaker than expected. The business climate index was at 104.2, compared with a forecast of 105.0, and down from 105.8 in August.
The dollar made particular gains against sterling after a report in a British newspaper sparked worries over troubles in the UK financial sector arising from the credit crisis.
Investors will be looking to U.S. housing and consumer confidence reports later in the session and analysts say weakness in these numbers could push the Federal Reserve to follow last week's half-percentage-point interest rate cut with more policy easing.
That should further erode the dollar's yield advantage over other currencies, particularly the euro.
However, the dollar's recent sharp declines have provided investors with some short-term buying opportunities.
"The dollar is gaining a little against the euro probably because it has been oversold for the last few sessions. But longer term, we remain negative on the dollar," said Marcus Hettinger, global currency strategist at Credit Suisse in Zurich.
"We think this recovery in the dollar is only for the short-term, because we have some data to be released later ... In the U.S., we have housing and consumer confidence data so this may change," he added.
(Reuters)