NEW YORK (Dow Jones)--The dollar rebounded from a 15-month low against major rivals in thin trading Wednesday, spurring investors to take profits as an overnight rally in higher-yielding currencies went too far.
Sterling was under the most pressure against the dollar among major currencies on the back of comments by the head of the Bank of England, which appeared to endorse a weak pound.
The euro failed to edge past a key technical level. The single currency had jumped to its highest level in more than two weeks during European trading, nearing its 2009 high of $1.5064.
The euro's gains were reversed in New York, but the U.S. currency failed to sustain its forward progress and exited active trading little changed from day-earlier levels versus the euro and yen. Compared to levels late last week, the dollar remains down sharply against the euro.
Kathy Lien, chief currency strategist at Global Forex Trading in New York, noted that "$1.50 is a very significant psychological resistance level." In a quiet session, marked by a lack of major economic indicators and very light trading, investors saw an opportunity to take profits, she said.
Late Wednesday afternoon, the euro was at $1.4976, from $1.4978 late Tuesday, according to EBS via CQG. The dollar was at Y89.82, from Y89.84, while the euro was at Y134.54, from Y134.58. The U.K pound was at $1.6565, from $1.6728. The dollar was at CHF1.0084, from CHF1.0083.
The Dollar Index, which tracks the U.S. currency against a trade-weighted basket of six currencies, was at 75.096, from 75.052.
Trading was subdued due to the Veterans and Remembrance Day holidays in the U.S. and Canada. North American bond markets were closed and foreign-exchange desks at most financial institutions were thinly staffed.
Pressure on the dollar and support for the euro had come on the heels of positive economic data in Asia overnight. Stronger-than-expected Chinese industrial production spurred confidence that global demand for metals and other commodities will pick up.
The data boosted the outlook for a faster economic recovery and encouraged investors to buy the euro and other high-yielding currencies as well as assets sensitive to growth.
Because of low volumes due to the North American holidays, a few big trades reverberated through lightly traded markets more than they would otherwise, noted Vassili Serebriakov, foreign-exchange strategist at Wells Fargo in New York.
"The direction is still for a lower dollar," said John McCarthy, manager of currency trading at ING Capital Markets in New York. "Positive risk sentiment, reinforced [Wednesday] by the better-than-anticipated Chinese data and the fact that interest rates will remain low around the world" will continue to put pressure on the dollar, he said.
The dollar may slide an additional 5% to 7% against the euro and the Australian dollar, given the "weak outlook for the U.S. economy and the dovishness of the central bank," Global Forex Trading's Lien said. That could push the euro to as high as $1.60 and the Australian dollar may hit 0.9950, she said.
Meanwhile, the U.K. pound slumped after Bank of England Governor Mervyn King said in a press conference accompanying the BOE's quarterly inflation report that recent sterling weakness would be supportive to an export-led recovery.
The weakness reflected expectations that U.K. interest rates will remain super-low for a long period, as well as investors' anxiety about the U.K.'s expanding debt burden, which could hamper the country's economic recovery.
With the BOE's continued ultra-accommodative monetary policy, "the pound is clearly the weakest link" among major currencies, and should continue to weaken, Serebriakov said.
Also, China came under new pressure from Pacific Rim countries Wednesday to let its currency rise, even as the U.S. stepped up its commitment to a strong dollar ahead of a regional summit.
As finance ministers from the Asia-Pacific Economic Cooperation forum were preparing to call for more currency flexibility--generally code for a rise in the yuan--U.S. Treasury Secretary Timothy Geithner gave a particularly spirited defense of the U.S. currency, saying he believes maintaining a strong dollar is "very important" for the U.S. economy.
In Beijing, China's central bank made a rare change to the official language of its exchange-rate policy, giving a nod to concerns about the declining dollar and surging capital inflows.
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