The dollar gained ground Tuesday along with Treasury prices as reports from credit ratings agencies raised concerns among investors over major government finances.
For more than a year, the dollar and short-term government debt has tended to trade inversely with stocks, commodities and emerging-market currencies, which investors deem riskier. Better-than-expected corporate and economic data has prompted equity buying and dollar selling. Meanwhile, unsettling events, such as the Dubai debt crisis, have tended to support the low-yielding dollar due to its safety appeal.
On Tuesday, the 16-nation euro slid to $1.4685 in late New York trading from $1.4823 late Monday. The British pound tumbled to $1.6261 from $1.6439, but the dollar dropped to 88.34 Japanese yen from 89.48 yen.
Currency traders also consider the low-yielding yen a safety play. Its steep rise against the dollar has prompted anxiety among Japanese government officials and corporate executives, who worry about that a stronger yen will make the country's exports more expensive for overseas buyers, weighing on its economic recovery.
On Tuesday, the Japanese government approved $81 billion in stimulus measures in order to bolster the economy's rebound.
UBS analysts Geoffrey Kendrik and Gareth Berry said they expected the yen would move lower in 2010, however, as the U.S. is expected to raise interest rates before the Bank of Japan. Higher interest rates can support a currency as investors move funds to where they earn the best returns.
Warnings from credit ratings agencies weighed on investors' taste for riskier trades Tuesday.
Moody's Investors Services, a leading credit ratings agency, said public finances in the U.S. and the U.K. were deteriorating. The two countries must fix their public finances in order to avoid threats to their top triple-A credit ratings, Moody's said.
Both countries have staggering budget deficits as they pump money into the economy in order to help counteract the downturn.
Meanwhile, Moody's also further cut its ratings on six Dubai state-linked companies, saying it cannot assume the government will stand behind the debts, while Fitch Ratings downgraded Greece's credit rating, saying it doubts the new government will be able to contain its huge debts. On Monday, Standard & Poor's warned it might downgrade its rating on Greece's national debt.
In other New York trading, the dollar rose to 1.0671 Canadian dollars from 1.0531 late Monday, and gained to 1.0283 Swiss francs from 1.0192 francs.
The dollar was also higher against the Australian and New Zealand dollars and many currencies in emerging markets.