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Dollar swoops down again

The dollar goes down again as investors reentered a thin post-holiday market amid uncertainty over interest rates.

An even thinner market Monday allowed the dollar to advance on positive U.S. employment data released Friday. But with Monday's Columbus Day holiday over, as well as holidays in Japan, China and Canada, currency investors who continue to question U.S. economic fundamentals switched their support to the euro and yen.

"The dollar got ahead of itself," said Michael Malpede, senior foreign exchange analyst at MF Global in Chicago. Movements were exaggerated Tuesday because relatively few investors were taking positions, he added.

Late Tuesday in New York, the euro was at $1.4098 from $1.4049 late Monday, while the dollar was at Y117.21 from Y117.38. The euro was at Y165.23 from Y164.85. The U.K. pound was at $2.0368 from $2.0355, according to EBS. The dollar was quoted at CHF1.1839 from CHF1.1860.

The release of minutes from the September Federal Open Market Committee meeting offered the dollar a brief reprieve before the euro and U.K. pound went to intraday highs at $1.4115 and $2.0370, respectively.

In September, the Federal Reserve cut its benchmark rate, sending the dollar into a tailspin. The minutes reflected the Fed's concerns over the dollar's decline, stating: "Inflation risks could be heightened if the dollar were to continue to depreciate significantly."

Some interpreted that sentence as an indication the Fed might not reduce rates again since price stability is a core mandate, and rate cuts typically depreciate the dollar's value. However, it's by no means a clear signal of the Fed's intentions, according to analysts.

"I think the market went into this meeting perhaps looking for a more dovish spin, a more downbeat assessment of the consumer," said Mike Moran, a foreign exchange strategist at Standard Chartered Bank in New York.

But the FOMC seemed "less" downbeat than the consensus expected, and so the dollar briefly showed modest gains, Moran said. In the end, it wasn't enough to stem the dollar's downturn.

"The mere idea that the Fed may be contemplating 'significant' dollar declines is not really dollar-positive," said Alan Ruskin at RBS Greenwich Capital.

On Wednesday, the dollar won't come under pressure from any major data releases in the U.S., but there are two influential speakers on tap - former Fed chairman Alan Greenspan and Boston Fed president Eric Rosengren.

Elsewhere, European Central Bank President Jean-Claude Trichet spoke to the monetary committee of the European Parliament early Tuesday. He reiterated his request for "verbal discipline" by the parties responsible for foreign exchange rates, and he reiterated that the ECB is in 'wait and see' mode and that the Group of Seven summit of leading industrialized nations later this month will discuss currencies.

In other market activity, the Australian dollar fell below US$0.90 Tuesday, dropping back from its 23-year high of US$0.9033 set Monday. Late Tuesday in New York, the Australian unit was at US$0.8990, down from US$0.9017 late Monday. Profit-taking in a thin market worked against the Australian dollar, said analysts.

Also, the Chilean peso ended at a fresh eight-year high Tuesday, amid mixed expectations over the central bank's monetary policy meeting later in the week. The dollar ended local trading at CLP497.90 compared with CLP498.60 at Monday's close, after trading in a CLP496.60-to-CLP500.90 range.

The peso has been steadily gaining over the past few sessions on expectations of a widening rate differential between local and U.S. interest rates, because the Chilean central bank has increased rates monthly in 25-basis-point increments for the past three months.

"Given the sustained high level of international energy prices and Chile's dependence on external sources for such input, uncertainties will remain seated on the horizon," said Bertrand Delgado, a New York-based currency analyst at IDEAglobal Inc., in a research note.

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