Dollar's gains fizzle in London

The dollar trimmed gains on Monday as investors said Osama bin Laden's death would do little to repair negative sentiment for the dollar, which has been stung by prospects that US interest rates will stay low. The euro recouped earlier losses versus the dollar after surprisingly strong eurozone manufacturing data fuelled speculation that overall growth in the region would prompt the European Central Bank to keep raising interest rates.
In contrast, the Federal Reserve has signalled US rates will stay low. This is seen keeping intact the dollar's rate disadvantage against the euro and pushing the single currency to the psychological $1.50 level, while the dollar is hobbled near a three-year low hit against a currency basket earlier on Monday.
"We saw a pretty good reading of manufacturing PMI in the eurozone," said Marcus Hettinger, currency strategist at Credit Suisse in Zurich. "In the end it's monetary policy expectations which are the driving force for dollar weakness," he said, adding that the long-term impact of bin Laden's death on the dollar was negligible.
By 1014 GMT, the euro traded 0.2 percent higher on the day at $1.4830, recovering from a session low $1.4765. Traders cited demand from a UK bank and European sovereign names as pushing the euro higher, but they added that flows were scarce due to market holidays in parts of Asia and in Britain.
Euro gains stung the dollar, which had initially climbed after US officials said US Special Forces had killed Bin Laden in Pakistan. The death of the al Qaeda leader was seen as positive for Washington, which had been hunting him for nearly a decade. The announcement triggered short-covering dollar demand, but the US currency was unable to maintain its upward momentum, suggesting risk sentiment stemming from geopolitical events was not the key focus of a market overwhelmingly concerned with relative interest rate differentials.
World leaders called for vigilance towards any possible retaliation. Analysts said such action could be positive for the dollar if it provoked a flight to safety towards the US currency but added this was unlikely for the moment. "An event like a retaliatory action would be dollar positive if it affects risk sentiment. But risk as a driver of the FX market has been much less than it has been," said Kasper Kirkegaard, currency strategist at Danske in Copenhagen.
The single currency remained close to $1.4882, a 17-month high hit last week, and technical analysts at Commerzbank saw support around $1.4720, a high hit in December 2008. In a note, they said they also saw support at $1.4747, a level on a trend line drawn from highs of February and April. Many analysts say a rise to $1.50 is just a matter of time. The dollar index traded at 73.026, a touch higher on the day. It retreated from a session high, and hovered near 72.813 touched in the Asian session, its weakest since mid-2008.
The index's decline of almost 4 percent in April has raised some concern about a correction in its downward momentum. Some measures, such as the 14-day relative strength index, show the dollar is oversold from a short-term perspective. The dollar rose 0.3 percent to 81.50 yen.
Illiquid markets resulted in choppy trade in the Australian dollar, which fell about 0.2 percent to $1.0943, retreating from a 29-year high of $1.1011 hit in early trade. A sharp fall in silver has prompted profit-taking in the Aussie and other high-flying commodity currencies including the Canadian dollar, which pulled back from a 3 1/2-year high versus it US counterpart.