NEW YORK: The low-yielding US dollar and yen faltered o n Tuesday, weighed down by an improving global economic backdrop that spurred investors to seek higher returns in other riskier currencies.
Solid demand at a Spanish bill auction and upbeat German investor sentiment gave investors a green light to leave the relative safety of the dollar and yen. That gave the euro support against the greenback.
The Canadian dollar was the best performing currency, jumping more than 1 percent after the Bank of Canada said it may need to start hiking rates due to firmer-than-expected growth and inflation. Sterling, the Australian dollar and New Zealand dollar also posted gains against the greenback, reflecting investors' increased appetite for risk.
"Risk sentiment is a little better today. We're seeing the dollar firm against the yen, while the riskier currencies such as the Aussie, Kiwi, and Canadian dollar are also higher," said Brian Kim, currency strategist at the Royal Bank of Scotland in Stamford, Connecticut.
Kim added that the BoC's less bearish assessment of the global economy also helped overall market sentiment.
In mid afternoon New York the euro was 0.1 percent lower at $1.3129 after earlier surpassing Monday's high to hit $1.3172. The session low posted at $1.3088.
The euro touched the session high after Spain's bill sales. Investors were relieved after Spain sold 3.2 billion euros of 12-month and 18-month bills, although at much higher yields compared with a month ago. A far bigger test will come on Thursday, when Spain sells 10-year and 2-year bonds.
It also drew support from a German ZEW survey that showed analyst sentiment in Europe's largest economy rising unexpectedly in April to its highest level since June 2010.
But the euro couldn't hold gains despite positive news. Analysts said the market was still worried about Spain's precarious fiscal position, and the most important test would come in an auction of Spanish 10-year debt on Thursday.
Spanish 10-year government bond yields dipped below 6 percent after jumping on Monday on fears its deficit and weak economy may force Madrid to seek international help.
"The upside in the euro is still very limited because we still have the Spanish auction on Thursday, and there's also the bigger picture," said Ron Simpson, director of FX research at Action Economics in Tampa, Florida. "Nobody is really keen on Europe right now."
The premium for euro puts, or bets it would fall, rose on Tuesday to around -2.2 vols, suggesting some nervousness about the euro zone debt situation. The euro's risk-reversal skew has steadily worsened since the beginning of the month, although traders said these are nowhere near panic levels.
"Confounding, confusing and whipsaw are three words we keep hearing to describe euro/dollar as it continues to frustrate attempts to break a near 3-month $1.30-$1.35 range," said Jay Meisler, founder and co-partner of GlobalView.com in Huntington, New York.
"Whether it is positioning, an invisible hand or some other unexplained factor, euro/dollar continues to frustrate."
The euro could face further tests with the G20 and IMF meetings at the end of this week and the first round of the French presidential election on April 22.
SPANISH BANKS AT RECORD BORROWING
Compounding Spain's fiscal woes, its banks borrowed a record 316.3 billion euros from the European Central Bank in March, almost double February's total, as they remained all but excluded from wholesale credit markets.
The euro was up 0.4 percent at 106.02 yen, recovering from Monday's trough where it fell to a level not seen since mid-February.
The single currency, however, fell 0.3 percent against sterling and slid 0.2 percent against the Norwegian crown and 0.1 percent against the Swedish crown .
The Canadian dollar, meanwhile, posted steep gains against the US dollar, with the greenback falling 1.1 percent to C$0.9879 with the session low at C$0.9861, a one month low.
The dollar rose 0.5 percent against the safe-haven yen to 80.75 yen -- above a seven-week low of 80.31 hit on Monday.
Traders said investors didn't want to get caught short the dollar versus the yen under 81 yen, citing talk this week of semi-official buying of the dollar below that figure.
The higher-yielding Australian dollar edged up 0.5 percent at US$1.0409 on the positive global sentiment. It cut earlier losses after Reserve Bank of Australia policy meeting minutes showed it would consider cutting interest rates in May if data confirmed a benign inflation outlook.
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