Dollar rebounds amid renewed caution

July 29, 2009

, NEW YORK, Jul 28 – The dollar gained against most major currencies Tuesday as a surprisingly strong drop in US consumer confidence prompted fresh caution about the outlook for economic recovery.

The euro retreated from a two-month high above 1.43 dollars, dropping to 1.4167 dollars at 2100 GMT compared to 1.4238 dollars late on Monday.

The dollar meanwhile fell against the Japanese currency, another safe haven play, to 94.60 yen from 95.16 yen.

Analysts said the markets appeared to be adopting a cautious approach against excessive optimism about the possibility of a global economic recovery.

The decline in US consumer confidence shown in a closely watched survey and some disappointing company results gave further justification for such caution.

The Conference Board, a business research firm, said its confidence index fell to 46.6 from 49.3 in June, after an eight-month peak of 54.8 in May. The figure was weaker than analysts\’ expectations of 49.0.

The report underscored fears that while the US economy is showing signs of recovery from recession, rising unemployment could dampen any recovery by hurting consumer spending, a key driver of economic activity.

"The disappointing consumer confidence report appeared to feed into the correction in market positioning that began in overnight trading, with players taking risk off the table," said Michael Woolfolk at Bank of New York Mellon.

Bruce Celek at PNC Bank said the market reversed course after Monday\’s action sparked by news of an 11 percent rise in new home sales.

"Yesterday\’s rise in new home sales provided the catalyst needed to drive the US stock market higher and give everyone the warm and fuzzy feeling that the worst is behind us," Celek said.

"Unfortunately, today reality has set back in with the release of US consumer confidence that was reported lower than expected."

Roman Kadinsky at Forex Capital Management said the dollar benefited from a rise in risk aversion.

"The US consumer remains vital to recovery as spending accounts for more than two-thirds of GDP (gross domestic product)," he said.

"Lower confidence and survey responses indicate that spending habits may not improve sharply and that growth in the third quarter is far from certain."

In late New York trading, the dollar stood at 1.0752 Swiss francs from 1.0703 Monday.

The pound was at 1.6428 dollars after 1.6489.

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